Sterling appears to have adopted a near-term bearish tilt as recent attempts to break above 1.35 have repeatedly faltered, potentially prompting some bulls to retreat, especially in a thinly traded summer market.

Despite these rejections, the subsequent pullbacks have been rather modest, suggesting underlying demand for the pound could be forming. The recent gains in sterling have been buoyed by shifting market expectations for Federal Reserve policy. Following the Fed's decision to leave rates unchanged, which was interpreted as dovish, and subsequent soft U.S. payrolls data, traders have adjusted their outlook, reducing expectations for rate hikes in the second half of the year. This backdrop has provided some support for GBP, but the upcoming U.S. Consumer Price Index (CPI) data on Wednesday will be crucial for gauging market sentiment. The Reuters consensus calls for a slight increase in both core and headline month-on-month readings, alongside a modest decline in year-on-year measures.

Additionally, next week's UK CPI data will provide insight into domestic inflation trends. However, given the recent instability in the Middle East and its impact on energy prices, investors may place less weight on the U.S. and UK inflation data due to the recent surge in oil prices following the breakdown of the U.S.-Iran memorandum of understanding.

For now, GBP/USD is encountering resistance at recent daily highs of 1.3530 and 1.3556. Support is likely to hold firm within the 1.3423-1.3408 zone, an area reinforced by a convergence of daily moving averages.
Sterling Chart:


(Paul Spirgel is a Reuters market analyst. The views expressed are his own)