GBP/USD corrects from 1.2600 as USD Index recovers strongly ahead of Fed’s policy

• GBP/USD has reported a corrective move to near 1.2560 after a solid recovery in the USD Index.
• The USD Index has recovered firmly to near 103.50 as investors getting anxious ahead of US inflation.
• Higher UK earnings could weigh more pressure on the BoE, which is already struggling to tame stubbornly high inflation.

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

S&P500 futures have turned choppy as investors have sidelined ahead of crucial United States economic events. The overall market mood is still upbeat as the odds of a neutral interest rate policy by the Fed are extremely solid. According to the CME Fedwatch tool, around 75% of chances are in favor of a neutral interest rate policy stance.

The USD Index has recovered firmly to near 103.50 as investors getting anxious ahead of US inflation. The pace in monthly headline Consumer Price Index (CPI) is seen contracting to 0.2% vs. the former pace of 0.4%. While the velocity in core CPI that doesn’t include oil and food prices is seen unchanged at 0.4%.

At the current juncture, easing US labor market conditions and weak economic activities have divided the street. However, signs of persistence in the US inflation could force Fed chair Jerome Powell to continue its policy-tightening spell.

Analysts at Rabobank see the Fed resuming the hiking cycle in July. For now, they expect one rate hike of 25 bps in July, followed by a longer pause, at least through the end of the year.”

On the Pound Sterling front, investors are awaiting the release of the United Kingdom Employment data (May). As per the estimates, Claimant Count Change is seen declining by 9.6K vs. a sheer addition of 46.7K reported in April. The Unemployment Rate for three months is seen higher at 4.0% against the prior release of 3.9%.

In addition to that, the catalyst that will keep investors on their toes is the Average Earnings data including bonuses.  Three months' earnings data is seen accelerating to 6.1% vs. the prior pace of 5.8%. Higher earnings could weigh more pressure on the Bank of England (BoE), which is already struggling to tame stubbornly high inflation. Apart from the UK labor market data, the speech from BoE Governor Andrew Bailey will be keenly watched.