GBP/USDfell slightly nL1N34A0WLon Wednesday, though it remained anchored near its 10-day moving average at 1.2311, after below-forecast UK PPI data hinted at softening inflation, pushing UK gilt yields lower and clouding BoE expectations, along with sterling's outlook.

Recent GBP/USD gains to 7-month highs by 1.2448 have been predicated on expectations the BoE would remain hawkish on rates in the face of persistent inflation.

The downside PPI surprise has tempered hawkish sentiment, with front-end UK rate futures 0#SON3: up 10 points and indicating a 90% chance of a 50bp BoE hike on Feb.
2 and a rate peak at 4.38% in August 2023, before rates dip in Q4 2023.

Should the BoE be seen as more dovish at the Feb. 2 meeting, 10-DMA support is likely to give way meaningfully as recent longs unwind and traders eye daily cloud top support at 1.2178 and the 55-DMA at 1.2113.

A less-hawkish rate path by the BoE may not have the deleterious effects of last March's slower BoE hike path, which pushed GBP/USD down from 1.34, but is likely to cap sterling gains as BoE-Fed rates converge.

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