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27 May 2025,04:05

Daily Market Analysis

Sterling Rallies as UK Inflation Surges, Dimming Rate Cut Bets

27 May 2025, 04:05

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Key Takeaways:

*UK inflation rose to its highest level in a year, with core CPI at 3.8% and services inflation hitting 5.4%, both exceeding expectations.
Food inflation climbed for the fourth consecutive month, driven by wage and tax pressures on supermarkets.

*Traders scale back BoE rate cut bets, pricing in only a 50% chance of a cut in August, down from 60%.

Fundamental Analysis

The British pound advanced, climbing above its recent highs as hotter-than-expected UK inflation data tempered expectations of imminent rate cuts by the Bank of England (BoE).

The headline inflation reading surged to its highest in a year, driven by rising food prices and stubbornly high services inflation. Food inflation climbed to 2.8% in May, up from 2.6% in April, marking the fourth straight monthly increase. Supermarkets are feeling the squeeze from higher operating costs, stemming from the UK government’s revenue-raising budget that includes a minimum wage hike and payroll tax increases—a package that could cost retailers an additional £5 billion ($6.7 billion), according to the British Retail Consortium (BRC).

Meanwhile, services inflation, a key metric closely tracked by the BoE, accelerated to 5.4% from 4.7%, surpassing the central bank’s 5.0% forecast. Core inflation, which excludes volatile components like energy and food, rose sharply to 3.8%, its highest reading since April 2023.

The stronger data forced markets to pare back bets on BoE rate cuts, with traders now assigning just a 50% chance of a rate cut in August, down from 60% earlier in the week. UK Treasury yields also edged higher, further supporting sterling’s rally against both the US dollar and the euro.

Looking ahead, investors are likely to tread cautiously ahead of the next BoE monetary policy decision, with inflation dynamics and wage data playing a crucial role in shaping expectations.

Technical Analysis – Dollar Index

GBP/USD, 4-Hour Chart: 

GBP/USD is trading higher and is currently testing the key resistance zone near 1.3610. A successful breakout could open the door toward 1.3755. However, MACD signals fading bullish momentum, and RSI at 73 is nearing overbought territory, potentially forming a bearish crossover.

If a technical correction occurs, the pair may retrace and consolidate between support at 1.3460 and resistance at 1.3610. A break below 1.3460 would expose a deeper downside toward 1.3265.


Resistance: 1.3610, 1.3755
Support: 1.3460, 1.3265

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