GBP/USD consolidates around 1.2730 as markets adopt caution ahead of Fed decision

• GBP/USD puts efforts to retrace its recent losses despite market caution.
• The US Dollar retreats on the decline in US Treasury yields.
• A slew of UK data is set to be released on Tuesday including CPI, PPI, and Retail Price Index.

GBP/USD appears to reverse its decline initiated on Thursday, hovering around 1.2730 during the Asian session on Monday. However, the pair faced setbacks amidst market caution preceding the US Federal Reserve’s interest rate decision on Wednesday.

The US Dollar Index (DXY) experienced a surge in momentum, buoyed by the rise in US Treasury yields on Friday. This uptick in yields was fueled by a hawkish sentiment surrounding the Federal Reserve, which was anticipated to maintain its heightened interest rates amidst recent inflationary pressures. However, a subsequent retreat in US yields exerted pressure on the US Dollar (USD), at the time of writing.

According to the CME FedWatch Tool, the probability of a rate cut in March presently stands at 1.0%, while it has diminished to 6.1% for May. The likelihood of a rate cut in June and July is lower, at 56.3% and 75.2%, respectively.

On Friday, the preliminary US Michigan Consumer Sentiment Index for March dipped to 76.5, from the previous reading of 76.9. This decline contrasts with expectations for it to remain steady. Meanwhile, Industrial Production (MoM) edged up by 0.1% in February, surpassing the anticipated flat reading of 0.0% and recovering from the previous month’s decline of 0.5%.

On the other side, Consumer Inflation Expectations, as released by the Bank of England (BoE) on Friday, rose by 3.0%, showing a decrease from the previous uptick of 3.3%. This data prompted markets to increase their wagers on a Bank of England (BoE) rate cut in June, potentially weakening the Pound Sterling (GBP) and consequently pressuring the GBP/USD pair downward.

On Monday, the Rightmove House Price Index (MoM) for March surged by 1.5%, surpassing the previous rise of 0.9%. Additionally, the annual index saw an increase of 0.8% compared to the previous 0.1%. Looking ahead to Tuesday, traders are expected to closely monitor several market indicators from the United Kingdom (UK), including the Consumer Price Index, Producer Price Index, and Retail Price Index.