COMMENT-Sterling bulls gassed near 1.2700

Sterling bulls took a breather after the pound rose to a 5-week high at 1.2701 in early Thursday trade, exhaustion setting in after Wednesday's soft CPI and retail sales and risk of a cap to gains before UK inflation data on May 22.

While Fed rate expectations have deviated little from pre-CPI levels, there was considerable angst surrounding the release as to the momentum of inflation moving toward the Fed's 2% target. However, with both core and headline inflation rates drifting lower that angst has abated, keeping September in focus for the Fed's initial rate cut.

Downward pressure on the pound has likely been exacerbated after MPC member Megan Greene took a less hawkish stance with regard to UK inflation and rate expectations.

Greene said there was more uncertainty about the path of inflation and removed reference to rate cuts being a way off, which given the recent dovish BoE shift may, depending on UK CPI data on May 22, highlight the possibility of a June BoE cut.

Ahead of UK CPI it is likely sterling traders will respect the 1.2709 April 9-10 highs. Should UK CPI come in soft, a dip below 1.2602, the 50% Fib of 1.2503-1.2701 should hasten GBP/USD's descent to May 9 lows at 1.2446.

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