Sterling is likely to remain tipped to the downside, sledding around its recent 1.3304-1.3450 range in the near term, as a convergence of cooling domestic inflation, fiscal anxiety, and political instability limits upside potential.

Today's weaker-than-expected UK CPI and RPI data significantly cooled Bank of England rate expectations, driving the probability of a June hike down to near 20%.

While a lower policy path removes a key pillar for GBP bulls, the reduced rate outlook may ultimately offer a silver lining by suggesting a growth resurgence could arrive sooner — depending on the volatile war-oil-inflation function.

However, even as UK front-end rates turn less hawkish, a shifting global inflation narrative has adjusted Fed expectations, stirring UK-U.S. rate convergence, as dovish Fed expectations ebb, which will temper GBP/USD gains.

Meanwhile, the softer inflation data does little to soothe deeper structural worries. UK 10-year yields remain anchored near trend highs above 5%, heightening fiscal concerns. This is compounded by a precarious political horizon as Prime Minister Keir Starmer faces challenges to his leadership. This political instability has raised fears of higher spending, stirring memories of the gilts market meltdown under PM Liz Truss in 2022.

Technically, GBP/USD faces immediate resistance at today's high of 1.3407, followed by the bruised 200-DMA at 1.3425 and the May 18 high at 1.3450. Conversely, support rests at the daily cloud base and Wednesday low area of 1.3379/76, with more significant demand at Monday's six-week low of 1.3304.

Given the Middle East conflict overhang, severe domestic headwinds, and more hawkish Fed policy expectations GBP/USD risks remain considerably skewed to the downside.
Sterling Chart:


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