• The Pound Sterling dipped to $1.28 in early trading on Wednesday, pulling back from a three-week high earlier in the month after UK inflation figures raised bets on interest rate cuts by the Bank of England.
• Annual inflation rose as expected but less than forecast at 2.2%.
• Services inflation also declined to 5.2%, its lowest level in two years and below the central bank's forecast of 5.6%.
• Core inflation also slowed more than expected. The probability of another 25-basis point cut in September rose to 47% from 36% before the release.

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As such, traders are now pricing in two more quarter-point cuts by the end of the year. Meanwhile, economic data released earlier in the week showed surprising strength in the UK labor market. The unemployment rate fell to 4.2% in the three months to June, missing expectations for a rise, and wage growth slowed to 5.4% from 5.8%, although it was still slightly above the Bank of England’s forecast.

In other trading, the UK 10-year bond yield fell below 3.9%, nearing a six-month low hit earlier in the month, after consumer price inflation came below expectations. Also, UK inflation rose to 2.2% in July, below the 2.3% forecast, with services inflation slowing markedly. The lower-than-expected inflation, although slightly above the Bank of England’s 2% target, supports speculation that the BoE may cut interest rates at its next meeting.

With the US trading session underway, bulls found an opportunity to push the GBP/USD pair towards the resistance of 1.2868 before quickly returning to stabilize around 1.2820 at the beginning of trading on Thursday, ahead of the release of a batch of important US and UK economic data. On the other hand, Bank of England officials are downplaying the significance of the unusual stall in the UK's most important market interest rate, saying it remains effective in reflecting what's happening in the markets. The overnight indexed swap rate, or SONIA, has remained at exactly five basis points below the Bank of England's rate since May 7 - or 70 business days. The previous record for data dating back to 1997 was only four sessions.

For their part, Bank of England officials said in a blog on Wednesday: “The stability of the SONIA rate for a long period is unprecedented. Given that the rate continues to reflect what is happening in the market - a change in market behavior that affects the shape of the distribution of prices - it is not necessarily a cause for concern.”

SONIA, which is referenced in over £90 trillion ($116 trillion) of new transactions annually, represents the average interest rate at which British banks borrow sterling overnight from other financial institutions. Furthermore, it is a key tool in the Bank of England’s monetary policy transmission as it is used to price financial contracts ranging from derivatives to mortgages.

Technical forecasts for the GBP/USD pair today:

Based on the daily chart, GBP/USD is trying to break the downtrend and may succeed if it moves towards the resistance levels of 1.2890 and 1.3000 respectively. On the other hand, and in the same time frame, a move towards the support level of 1.2750 will be important for the strength of the bears’ control over the general trend again. Today’s GBP/USD pair will be affected by the announcement of the UK economic growth reading.

As for the US dollar, it will be affected by the announcement of the US retail sales figures, the US weekly jobless claims number, and the Philadelphia manufacturing index reading. Finally, this is in addition to indications from global central bank officials regarding the future of tightening or not.

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