GBP/USD Remains Below 1.2650; Attention Turns To UK CPI And US Retail Sales data

On Wednesday morning, the GBP/USD pair posts modest gains below the mid-1.2600s during the early Asian session. As a result of the ongoing geopolitical tension in the Middle East and weaker-than-anticipated wage growth in the United Kingdom, the British Pound (GBP) may experience some selling pressure and its upward movement may be capped. Presently, GBP/USD is trading near 1.2636, an increase of 0.05% on the day.

In accordance with market expectations, the Office for National Statistics (ONS) reported on Tuesday that the UK ILO Unemployment Rate remained unchanged at 4.2% in the three months leading up to November. In contrast, the number of individuals applying for unemployment benefits increased by 11.7% in December, compared to a 0.6% increase in November. The final reading of the UK Employment Change data for November was 73K, as opposed to the previous estimate of a 50K increase.

Furthermore, the Average Earnings, exclusive of incentives, decreased from 7.2% to 6.6%, while the Earnings data, which incorporates bonuses, exhibited a decelerated growth rate of 6.5% compared to the previously estimated 6.8%. The weaker wage growth in the United Kingdom during the three months leading up to November provides additional support for the Bank of England's (BoE) proposition to commence interest rate reductions in the foreseeable future.

Conversely, the escalating geopolitical tension in the Middle East provides a certain degree of resistance for safe-haven assets such as the US Dollar (USD). The United States conducted an additional airstrike in Yemen that targeted a Houthi missile facility. The three US military strikes against Houthi targets were initiated, as stated by US Central Command, due to the imminent threat that the four missiles posed to US Navy ships and merchant vessels.

Investors have also reduced their wagers on Federal Reserve (Fed) rate reduction speculation in the wake of remarks by Fed Governor Christopher Waller. Waller stated on Tuesday that the target range for the federal funds rate could be lowered by the central bank this year, but that the reduction should be methodical and cautious. Investors have priced in a 67% probability, per the CME FedWatch tool, that the FOMC will initiate rate cuts in March. As a consequence, the Greenback gains value, thereby generating a headwind for the GBP/USD pair.

Subsequently, market participants will closely observe the Consumer Price Index (CPI) data for December inflation in the United Kingdom. Anticipated is a 0.2% MoM increase in the CPI following a 0.2% decline in November. In addition, US Retail Sales, which are anticipated to increase by 0.4% MoM from the previous 0.3%, will be disclosed. In the vicinity of the GBP/USD pair, traders will identify trading opportunities based on these figures.