• The Pound Sterling moves higher above 1.2700 as the UK inflation cools down further in line with expectations.
• UK service inflation remains sticky, which could restrict the BoE from committing rate cuts in the near term.
• Slower-than-expected US Retail Sales growth has limited the US Dollar upside.

The Pound Sterling (GBP) edges higher above the round-level resistance of 1.2700 on Wednesday after the United Kingdom (UK) Office for National Statistics (ONS) showed that price pressures declined as expected in May. UK’s annual headline inflation returned to the central bank’s target of 2% for the first time in more than three years from April’s reading of 2.3%. In the same period, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, declined to 3.5% from the former reading of 3.9%.

Monthly headline inflation grew steadily by 0.3% but lower than estimates of 0.4%. The report also showed that the annual Producer Price Index (PPI) for Core Output grew significantly by 1.0% in May, compared with the 0.3% increase a month earlier.

In spite of a decline in the annual headline CPI to 2%, Bank of England (BoE) policymakers might not be comfortable with discussions on early rate cuts as annual service inflation barely decelerated. Inflation in the service sector grew by 5.9%, slightly lower than the prior release of 6.0%, but is almost double that which is needed to contain price pressures.

The next trigger for the Pound Sterling will be the BoE’s monetary policy decision, which will be announced on Thursday. The BoE is widely anticipated to keep the interest rate unchanged at 5.25%. Therefore, investors will focus on vote split and fresh cues about when the BoE will start reducing interest rates.