On Wednesday, the GBP/USD pair gained bullish momentum, reaching its highest level since May 10 around 1.2650. While the pair appears to be technically overbought, investors may hold back from betting on a downward correction in anticipation of the Federal Reserve's significant monetary policy announcements.

Earlier in the week, strong wage inflation data from the UK led to an increase in the rate-sensitive 2-year UK gilt yield, which boosted the performance of the British Pound against other currencies. In the latter half of the day, the US Dollar (USD) faced selling pressure, allowing the GBP/USD pair to extend its daily rally. The US Consumer Price Index (CPI) revealed a decrease in annual inflation from 4.9% in April to 4% in May, which somewhat reassured the market about the possibility of no interest rate changes by the Fed in June.

Despite the UK data indicating a contraction of 0.3% in both Industrial Production and Manufacturing Production for April, the British Pound managed to hold its ground against major counterparts.

Later in the day, the Federal Reserve will release the revised Summary of Economic Projections (SEP), known as the dot plot, along with the policy statement. The market will closely observe the Fed's messaging regarding future rate hikes and its assessment of the current situation.

If the Fed aims to convince the market that it is not finished with rate hikes and will use the time until the July meeting to evaluate the situation, the USD could gain support, limiting the upside potential for GBP/USD. Conversely, if the dot plot reveals a downward revision to the end-2024 rate projection or suggests that some policymakers anticipate a rate cut later in the year, the USD is likely to weaken further.