GBP/USD corrects from 1.2600 as DXY rallies strongly ahead of Fed

• GBP/USD has reported a corrective move to near 1.2560 following a strong DXY rally.
• The DXY has rallied strongly to approach 103.50 as investors are anxious about US inflation.
• Rising UK profits could put more pressure on the Bank of England, which is already struggling to rein in stubbornly high inflation.

The pair GBP/USD has shown a corrective move to near 1.2560 in the European session. The Pound faced some barriers around 1.2600 as the US Dollar Index (DXY) has shown a strong recovery. Investors have shown interest in the DXY as anxiety among investors is accelerating ahead of the Federal Reserve’s (Fed) interest rate decision.

S&P 500 futures have turned choppy as investors have stayed on the sidelines ahead of crucial US economic events. Overall market sentiment remains upbeat as the chances of the Fed pursuing a neutral interest rate policy are very strong. According to CME’s Fedwatch tool, about 75% of the odds are in favor of neutral interest rate policy.

The DXY has rallied strongly to near 103.50 as investors fret over US inflation. The rhythm of the monthly consumer price index (CPI) contracted to 0.2% compared to the previous 0.4%. While the core CPI figure, which does not include oil or food prices, stands at 0.4%.

At the current juncture, the relaxation of US labor market conditions and the weakness of economic activities have divided opinions. However, signs of persistent inflation in the US could force Fed Chairman Jerome Powell to continue his tightening policy.

Rabobank analysts see the Fed resuming the hike cycle in July. For now, they expect a 25 basis point rate hike in July, followed by a longer pause, at least until the end of the year.”

As for the British Pound, investors are awaiting the release of UK employment data (May). According to estimates, the number of job applicants fell by 9.6 thousand, compared to the 46.7 thousand registered in April. The quarterly unemployment rate stands at 4.0%, up from 3.9% previously posted.

In addition, the catalyst that will keep investors on their toes will be the data on average earnings, including bonuses. The three-month earnings data accelerates to 6.1% from the previous pace of 5.8%. Rising profits could put more pressure on the Bank of England (BoE), which is already struggling to rein in stubbornly high inflation. Aside from UK labor market data, BoE Governor Andrew Bailey’s speech will be the focus of much attention.