GBP/USD sticks to gains near mid-1.3500s post-UK CPI, lacks bullish conviction

• GBP/USD gained traction for the second successive day amid modest USD weakness.
• A positive risk tone was seen as a key factor that undermined the safe-haven buck.
• Stronger UK CPI acted as a tailwind for the British pound and remained supportive.
• Traders now await US Retail Sales and FOMC meeting minutes for a fresh impetus.

The GBP/USD pair maintained its bid tone above mid-1.3500s heading into the early North American session and had a rather muted reaction to the UK inflation report.

The pair edged higher for the second successive day on Wednesday and recovered further from the two-week low, around the 1.3485 region touched in the previous session. The global risk sentiment remained well supported by receding fears about a conflict between Russia and the West over Ukraine. This, in turn, continued weighing the safe-haven US dollar and extended some support to the GBP/USD pair.

On the other hand, the British pound was underpinned by Tuesday's stronger UK wage growth figures and hotter than expected UK consumer inflation data released this Wednesday. In fact, the headline UK CPI edged higher to 5.5% YoY rate in January as against the 5.4% anticipated and the previous. Adding to this, the core CPI, which excludes food and energy prices, rose to 4.4% YoY from 4.2% in December.

The incoming macro releases have bolstered the case for additional monetary policy tightening by the Bank of England, which, in turn, continued acting as a tailwind for sterling. That said, tensions over the Northern Ireland Protocol might hold back bulls from placing aggressive bets. Apart from this, the prospects for a 50 bps Fed rate hike in March should limit the USD losses and cap the GBP/USD pair.

Hence, it will be prudent to wait for strong follow-through buying before positioning for any further appreciating move. Market participants now look forward to the US economic docket, highlighting the release of monthly Retail Sales data. The focus, however, will remain on the FOMC meeting minutes, which will influence the USD demand and provide a fresh directional impetus to the GBP/USD pair.

Technical levels to watch