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GBP/USD: British Pound Grasps on to Support Ahead of UK Inflation

GBP/USD: British Pound Grasps on to Support Ahead of UK Inflation

James Stanley, Senior Strategist

Talking Points:

- Tomorrow brings UK Inflation for the month of January, and this will receive considerable attention.

- Retail traders are currently net short in GBP/USD via IG Client Sentiment, to a tune of 1.19-to-1.

- Are you looking to improve your trading approach? Check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

If you’re looking for longer-term analysis on GBP or USD, click here for our Trading Forecasts.

GBPUSD Rip and Dip on BoE

Last week saw quite a bit of volatility in the British Pound around the Bank of England’s Super Thursday. The rate decision, quarterly inflation report and press conference all pointed to a more-hawkish tilt at the Bank of England; and Mark Carney warned that faster and larger rate hikes were on the horizon for the UK economy. Correspondingly, the British Pound rallied as GBP/USD shot back-above the 1.4000 psychological level. But that strength was short-lived, and a reversal began to show shortly after Mr. Carney finished talking last Thursday.

At this point, prices have moved right back towards that confluent zone of support that we were looking at last week, with both a Fibonacci level and a channel mid-line within close proximity of each other.

GBP/USD Daily Chart: Prices Test Below Confluent Support with Fibonacci, Mid-Line

gbpusd daily chart

Chart prepared by James Stanley

UK Inflation to Set the Stage

Tomorrow morning brings the first inflation report out of the UK including 2018 data, and given the recent scope of inflationary pressure in the UK, we’ll likely be seeing a number around 3%. The expectation for tomorrow is for January inflation to come-in at 2.9%, or just a hair inside of that 3% figure that really got markets’ attention in the second-half of last year. If we come-out above 3%, expect strength to show as markets hurriedly try to factor-in even higher probabilities for two rate hikes out of the UK in 2018.

The big question is whether this will be enough to bring bulls back into the trend. As we saw last week after the BoE, there are other factors at work, and the reversal in Cable is likely resultant of a grander theme taking place in the US Dollar. After that BoE-fueled jump in GBP/USD, DXY moved down to test support; and when bulls bought that dip in USD, GBP/USD began to cave-lower.

GBP/USD Hourly Chart: BoE Strength (Green) Quickly Dissipates

gbpusd hourly chart

Chart prepared by James Stanley

Look for a Deeper Pullback for Longer-Term Bullish Continuation Strategies

This could equate to a deeper pullback in that longer-term trend of GBP/USD strength. Last Wednesday, ahead of the BoE, we looked at a deeper zone of support that could be attractive for bullish continuation strategies. This zone is comprised of a group of prior swing highs that had helped to set resistance in the final four months of last year. Shortly after the open of this year, as USD-weakness was coming back with aggression, price action in GBP/USD shot-through this area without so much as a hesitation. To date, this area has yet to function as support; and if we do see buyers return should price re-test this area, then attractive risk-reward ratios can be possible given the close proximity to the prior swing-low at 1.3458.

GBP/USD Daily Chart: Deeper Support Zone Potential

gbpusd daily chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on GBP/USD? Our DailyFX Forecasts for Q1 have a section specifically for GBP/USD. We also offer a plethora of resources on our GBP/USD page, and traders can stay up with near-term positioning via our IG Client Sentiment Indicator.

--- Written by James Stanley, Strategist for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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