GBP/USD trades with mild positive bias just below 1.2700, lacks bullish conviction

• GBP/USD scales higher for the second straight day and recovers further from a one-month low.
• Wednesday’s hotter UK CPI dashed hopes for an early rate cut by the BoE and underpins the GBP.
• Reduced bets for a more aggressive Fed easing act as a tailwind for the USD and should cap gains.

The GBP/USD pair attracts some buyers for the second straight day on Wednesday and looks to build on the previous day’s goodish bounce from sub-1.2600 levels, or over a one-month low. Spot prices currently trade just below the 1.2700 round-figure mark and remain well supported by reduced bets for an early interest rate cut by the Bank of England (BoE).

The UK Office for National Statistics (ONS) reported on Wednesday that the Consumer Price Index (CPI) rose for the first time in 10 months, to 4.0% in December from a more-than-two-year low of 3.9% in the previous month. Adding to this, the core gauge, which excludes volatile food, energy, alcohol and tobacco prices, was unchanged at 5.1% in December as compared to a fall to 4.9% anticipated. The markets were quick to react and are now pricing in a roughly 60% chance that the BoE will start to cut rates by mid-May, down from just over 80% late on Tuesday, which, in turn, is seen underpinning the British Pound (GBP).

The US Dollar (USD), on the other hand, edges lower amid some profit-taking following the recent run-up to the highest level since December 13 and turns out to be another factor acting as a tailwind for the GBP/USD pair. That said, investors continue to scale back their expectations for a March interest rate cut by the Federal Reserve (Fed) following the release of the upbeat US Retail Sales figures on Wednesday. This remains supportive of elevated US Treasury bond yields, which should help limit any meaningful USD downfall and hold back traders from placing aggressive bullish bets around the currency pair.

Meanwhile, speculations that the Fed will keep rates higher for longer, along with geopolitical risks and China’s economic woes, continue to weigh on investors’ sentiment. This is evident from a generally weaker tone around the equity markets, which could further benefit the Greenback’s relative safe-haven status against its British counterpart. Hence, it will be prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has formed a near-term bottom and positioning for a further appreciating move in the absence of any relevant market-moving economic releases from the UK.

Later during the early North American session, traders will take cues from the US economic docket – featuring the usual Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, Building Permits and Housing Starts. Apart from this, a scheduled speech by Atlanta Fed President Raphael Bostic and the US bond yields will influence the USD price dynamics, providing some impetus to the GBP/USD pair.

Technical levels to watch