GBP/USD holds below 1.2650, focus on UK CPI, US Retail Sales data

• GBP/USD snaps a three-day losing streak near 1.2637 on Wednesday.
• UK ILO Unemployment Rate remained steady at 4.2% in three months to November.
• The escalating Middle East geopolitical tension lifts safe-haven assets like the US Dollar (USD).
• Investors will closely monitor the UK Consumer Price Index (CPI) and US Retail Sales data for December.

The GBP/USD pair posts modest gains below the mid-1.2600s during the early Asian session on Wednesday. The upside of the pair might be capped due to the softer-than-projected UK wage growth and the ongoing geopolitical tension in the Middle East, which exert some selling pressure on the British Pound (GBP). GBP/USD currently trades around 1.2636, up 0.05% on the day.

Data from the Office for National Statistics (ONS) revealed on Tuesday that the UK ILO Unemployment Rate remained steady at 4.2% in three months to November, in line with market expectation. Meanwhile, the number of people claiming jobless benefits rose by 11.7K in December from an increase of 0.6K in November. Finally, the UK Employment Change data for November arrived at 73K from the previous reading of a 50K gain.

Additionally, the Average Earnings excluding bonuses eased to 6.6% from 7.2%, and the Earnings data including bonuses grew at a slower pace of 6.5% versus 7.2% prior, worse than the 6.8% estimated. The softer UK wage growth in the three months to November supports the case for the Bank of England (BoE) to start cutting interest rates in the coming months.

On the other hand, the rising Middle East geopolitical tension lends some support to safe-haven assets like the US Dollar (USD). The US carried out another airstrike targeting a Houthi missile facility in Yemen. According to US Central Command, the third US military strike against Houthi targets was launched because the four missiles posed an imminent threat to merchant vessels and US Navy ships.

Furthermore, investors have decreased their bet on rate cut speculation from the Federal Reserve (Fed) following Fed Governor Christopher Waller's comments. Waller stated on Tuesday that the central bank will be able to lower the target range for the federal funds rate this year, but it should be lowered methodically and carefully. According to the CME FedWatch tool, investors have priced in a 67% chance that the FOMC will begin cutting rates in March. This, in turn, lifts the Greenback and acts as a headwind for the GBP/USD pair.

Moving on, market participants will monitor the December UK inflation data, as measured by the Consumer Price Index (CPI). The CPI figure is expected to rise 0.2% MoM from a 0.2% drop in November. Additionally, US Retail Sales will be released, which is estimated to grow by 0.4% MoM versus 0.3% prior. Traders will take cues from these figures and find trading opportunities around the GBP/USD pair.