Pound Sterling extends losses against US Dollar as trade concerns ease

• The Pound Sterling retraces further to near 1.3460 against the US Dollar as the Greenback recovers amid optimism on the EU-US trade front.
• The improvement in US-China trade relations has boosted US Consumer Confidence.
• Markets don't expect the BoE to cut interest rates in June.

The Pound Sterling (GBP) extends its correction to near 1.3460 against the US Dollar (USD) during European trading hours on Wednesday. The GBP/USD pair retreats for a second consecutive day after refreshing a three-year high at around 1.3600 on Monday as the US Dollar (USD) gains ground on hopes that the United States (US) and the European Union (EU) will reach a trade deal soon.

The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, rises to near 99.80, extending Tuesday's recovery move.

On Tuesday, US President Donald Trump expressed confidence in a post on Truth.Social that the EU is increasing efforts to reach a bilateral trade deal. "I was extremely satisfied with the 50% Tariff allotment on the European Union, especially since they were 'slow walking'. I have just been informed that the EU has called to quickly establish meeting dates. This is a positive event, and I hope that they will," Trump wrote.

Increasing optimism over the US-EU trade deal has helped the US Dollar claw back almost the losses seen on Friday, when US President Trump threatened to impose a flat 50% tariff on imports from the EU.

Another reason behind the recent strength in the US Dollar is the upbeat US Consumer Confidence data for May. The data, released on Tuesday, showed that Consumer Confidence increased substantially to 98.0 after deteriorating for five consecutive months. The commentary from the Conference Board showed that de-escalation in US-China trade tensions contributed significantly to lifting households' mood.

Daily digest market movers: Pound Sterling takes a breather after a strong run-up 

• The Pound Sterling underperforms its peers during European trading hours on Wednesday. The British currency takes a breather after a sharp rally in the past few trading days as investors look for fresh cues about whether the Bank of England (BoE) will cut interest rates again at its June policy meeting.
• The BoE reduced its borrowing rates by 25 basis points (bps) to 4.25% earlier this month, with a 7-2 vote split, and guided a "gradual and cautious" interest rate cut approach.
• The latest strong United Kingdom (UK) Consumer Price Index (CPI) and Retail Sales data for April, along with the upbeat Q1 Gross Domestic Product (GDP) figures, are sufficient to discourage BoE officials from cutting interest rates further.
• This month, the UK service inflation data, closely tracked by BoE policymakers, accelerated sharply to 5.4% year-over-year from 4.7% in March. Month-on-month, Retail Sales rose at a robust pace of 1.2%, compared to the 0.1% seen in March. UK economic growth came in at 0.7%, significantly higher than the 0.1%  recorded in the last quarter of 2024.
• The International Monetary Fund (IMF) has raised the UK GDP growth forecast for the current year to 1.2%, slightly higher than 1.1% anticipated earlier, on the back of an upbeat economic performance in the January-March period.
• This week, investors will focus on the Personal Consumption Expenditure Price Index (PCE) data for April, which will be released on Friday. The inflation data is unlikely to influence market expectations for the Federal Reserve's (Fed) monetary policy outlook as officials are expected to remain on hold until they get clarity on new economic policies under Trump's leadership and the scope of their consequences on the economy.

Technical Analysis: Pound Sterling falls to near 1.3460

The Pound Sterling retraces to near 1.3460 against the US Dollar from the three-year high around 1.3600 on Monday. Despite the recent decline, the outlook of the pair remains firm as the 20-day Exponential Moving Average (EMA) slopes higher around 1.3380.

The 14-day Relative Strength Index (RSI) holds above 60.00, suggesting that the bullish momentum is intact.

On the upside, the January 2022 high of 1.3750 will be a key hurdle for the pair. Looking down, the 20-day EMA will act as a major support area.