Sterling rallied to a 2-month high at 1.2761 in early European trading, after hotter than forecast UK CPI diminished recent dovish BoE rate cut expectations providing fodder for further gains toward late-March highs by 1.2803 as UK-U.S.
rate spreads narrow.

The data, core and headline, showed continued progress lower, though the upside miss pared market expectations of June and August rate cuts.

The flash rise to 1.2761 post-CPI hints that traders are leaning toward a less-dovish BoE direction in the near-term, diminishing some of the rate cut speculation that resulted from the May 9 MPC meeting.

Though cable fell back toward recent peaks in the 1.2720s, it stabilized at stronger levels on the day.

With a June cut seemingly off the table, and a August move priced just below 50%, sterling bulls appear poised to make a run at upside targets at the March 21 high 1.2803, and the March 8 2024 high at 1.2894.

Sterling IMM positioning 1096742NNET in early 2024 had been rising as UK rate expectations, owing to above target inflation, were expected to remain above U.S. rates.

Should UK inflation reduction stall as it has in the U.S., high-for-longer UK rate sentiment could dominate, leading the current net short GBP positioning to flip back to long as bulls target 2024 highs.

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