Pound Sterling drops sharply as UK headline inflation deflates significantly in January.

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• Pound Sterling drops sharply as UK headline inflation deflates significantly in January.
• Soft UK CPI data has propelled BoE’s rate-cut bets.
• Stubborn US inflation data has pushed back Fed rate-cut hopes.

The Pound Sterling (GBP) faces an intense sell-off in Wednesday’s early European session as the United Kingdom Office for National Statistics (ONS) has reported softer-than-anticipated inflation data for January. Annual headline and core Consumer Price Index (CPI) rose steadily by 4.0% and 5.1%, respectively, while the monthly headline figure deflated significantly by 0.6%.

Surprisingly soft inflation report and a moderate growth in Average Earnings are expected to allow Bank of England (BoE) policymakers to consider early rate cuts than market participants had anticipated earlier.

Last week, BoE Deputy Governor Sarah Breeden said rate cuts will be based on how inflation and wage growth will evolve. The Pound Sterling tends to face foreign flows if expectations for BoE’s dovish bets escalate.

The GBP/USD pair is expected to remain in the negative trajectory due to softening consumer price inflation and dismal market sentiment. The broader appeal for safe-haven assets improves as sticky United States inflation data push back expectations for a rate-cut decision by the Federal Reserve (Fed) in the May monetary policy meeting. Fed policymakers lack evidence to build confidence over inflation declining sustainably towards the 2% target. This has boosted the US Dollar as a hawkish narrative by the Fed tends to attract more foreign inflows.

Pound Sterling falls back vertically after failing to sustain above the round-level resistance of 1.2600. The near-term outlook of the GBP/USD pair has turned bearish as it has dropped below the 20, 50 and 100-day Exponential Moving Averages (EMAs). The Cable is declining towards the 200-day EMA, which trades around 1.2510.

The 14-period Relative Strength Index (RSI) has dropped to 40.00. A slippage below the same would trigger a bearish momentum.

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