Pound Sterling is performing well this week, rising nearly 0.3% against the US Dollar after unexpected increases in May’s CPI figures. Both overall inflation and core inflation rates are now in the mid-3% range, climbing after hitting lows in late 2024, when the headline was just below 2% and core was above 3%. These inflation numbers will play a key role in discussions ahead of the Bank of England’s meeting on Thursday, where many expect rates to remain unchanged. The short-term rate markets predict around 50 basis points of easing by the end of the year, which includes two expected cuts of 25 basis points each—one by September and another by December. Despite a recent dip, the trend for GBP remains bullish as it trades above the 50-day moving average of 1.3381. However, momentum has weakened, and further losses could lead to a review of the current outlook. The current support level is at 1.3400, while resistance is around 1.3550.

Inflation Data And Market Assumptions

Sterling is seeing a slight rise in the middle of this week, boosted by inflation figures that were higher than expected. When we mention that CPI and core inflation are now in the 3% range, it indicates that price pressures are lasting longer than many predicted. This comes after a notable decline towards the end of 2024, particularly when the headline figure approached the Bank of England’s 2% target. Prices have started climbing again, indicating a recovery in both the overall measure and the core inflation figure that excludes volatile items. Markets had been thinking that inflation was no longer a concern, which influenced expectations for rate cuts. There was a general agreement on two cuts: one in late summer and another towards year-end. That belief holds for now, but it’s essential to reconsider where these new data leave us. The Monetary Policy Committee may find it easier to justify maintaining the current rate given the recent rise in inflation. Currently, the pound is trading above the 50-day moving average, suggesting medium-term strength is still present. While it’s not rapidly increasing, it is holding steady above key levels. However, momentum is not as strong as it once was. The slowing price action can often precede short-term corrections, especially if the upcoming meeting hints at a more cautious approach to rate cuts.

Technical Insights And Risk Management

From a technical standpoint, it’s clear. If prices drop below the 1.3400 level, we will need to reassess our bullish outlook. Conversely, if Sterling gains further support from a cautious stance from policymakers regarding rate cuts, it could rise to the 1.3550 mark, where sellers typically surface. This situation provides new opportunities for derivatives desks preparing for short-term strategies. Adjusting inflation expectations and rate scenarios isn’t just theoretical—it affects risk management in both directional and volatility strategies. With the latest CPI data potentially postponing easing expectations or narrowing their range, we might notice shifts in volatility premiums. It’s advisable to stay alert—not only to policy signals but also to any differences in expectations across rates and FX markets. The options market offers the ability to capitalize on moves when momentum returns while hedging risks if inflation remains unstable. With prices near important trend signals and support levels, adjusting risk actively is crucial, rather than waiting for outcomes. Create your live VT Markets account and start trading now.

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