GBP/USD drifting lower ahead of UK inflation

• UK inflation expected to fall sharply on Wednesday
• IMF revises upwards UK growth forecast

GBP/USD is trading quietly at 1.2423, down 0.11% on the day.

UK inflation expected to ease

UK inflation has been a thorn in the side of the Bank of England for months and is still above 10%. The UK releases the April inflation report on Wednesday and relief may finally have arrived. Headline CPI is expected to fall from 10.1% all the way to 8.3% y/y. That would be welcome news, but core CPI, which is a better gauge of inflation trends, is projected to remain unchanged at 6.2% y/y.

Bank of England Governor Bailey reiterated today in testimony before the Treasury Select Committee that inflation has turned the corner, and we’ll know if he’s correct on Wednesday. Even if inflation surprises to the downside, it will be miles higher than the 2% target which Bailey has pledged to reach. That means that more rate hikes are likely until both headline and core inflation show rapid declines.

Bailey received some good news from the International Monetary Fund, which revised upwards its growth forecast for 2023 from -0.3% to +0.4%. This means that the UK economy, while still struggling, will avoid a recession. The IMF projected that UK inflation would fall to around 5% by the end of the year and drop to the 2% target by the middle of 2025.

US debt ceiling standoff continues

The US dollar is higher against most of the majors today, as investors remain concerned about the US debt ceiling standoff. The Democrats and Republicans continue to negotiate, with a June 1st deadline just a week away. The yield on the US 10-year Treasury notes has risen to 3.75%, its highest level since March. This has given a boost to the US dollar and yields could continue to push higher the closer we get to the deadline without a deal. The United States government has never defaulted on its debt, and a deal is likely to be hammered out before the deadline.

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GBP/USD Technical

• There is support at 1.2307 and 1.2221
• 1.2375 and 1.2461 are the next resistance levels

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