The primary factor influencing market pricing and the GBP's short-term outlook is the UK inflation report due on Wednesday. Consensus expectations suggest that the headline CPI will decrease from 3.2% to just above the Bank of England’s (BoE) 2% target. This could limit GBP’s upward momentum if traders focus on weakening rate differentials rather than the improving growth outlook.

The report’s outcome could either trigger the beginning of an interest rate-cutting cycle at the BoE next month, which would be negative for GBP, or signal to policymakers that the battle against inflation is not over, which would be positive for GBP.

Notably, the services component of the inflation basket is likely to generate the biggest market reaction, as the BoE has emphasized its focus on this area. Deputy Governor Ben Broadbent highlighted on May 9th that he will scrutinize services inflation more closely than wages in the short term.

The GBP/EUR exchange rate has trended higher in recent days, comfortably returning to the middle of the 2024 range. Although the pair is still down for May, last week's recovery has improved the technical outlook, and a retest of 1.17 could occur in the coming days. However, significant movement is unlikely before Wednesday’s UK inflation data release. It is possible that GBP/EUR may slip earlier in the week as investors reduce exposure ahead of the report.

Against the USD, GBP recorded its second-best weekly advance of 2024, hovering at six-week highs around GBP/USD 1.27. Signs of cooling US inflation and a weakening US economy have increased the likelihood of Federal Reserve rate cuts, exerting pressure on the USD.