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British Pound Forecast: GBP/USD Looks to UK Inflation Data for Directional Bias

British Pound Forecast: GBP/USD Looks to UK Inflation Data for Directional Bias

Diego Colman, Contributing Strategist

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GBP/USD OUTLOOK

  • British pound gains against the U.S. dollar following solid UK employment data, despite hotter-than-expected U.S. CPI numbers
  • Market attention now shifts to UK inflation figures on Wednesday
  • This article looks at key GBP/USD technical levels to keep an eye on over the coming sessions
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Most Read: US Dollar Outlook Post Inflation Upside Surprise, Setups on EUR/USD & USD/JPY

GBP/USD (cable) gained ground on Tuesday after UK employment numbers topped estimates, but its upside was capped by stronger-than-expected January U.S. CPI figures, a result that boosted Treasury yields across tenors, but mostly on the front end.

When market participants fully digest the recent U.S. inflation data, expectations for the Fed's terminal rate could settle a little higher, creating a constructive environment for the U.S. dollar, at least in the very near term. This could jeopardize the pound's recovery, especially if rate differentials start to undermine the British currency again, but this has not happened since the beginning of the month, as seen in the chart below, where UK/US bonds spreads are becoming less and less negative in the 2- and 10-year stretch of the curve.

GBP/USD VS UK-US RATE DIFFERENTIALS

Chart  Description automatically generated

Source: TradingView

To better assess the near-term outlook for the exchange rate, traders should keep a close eye on data releases on both sides of the Atlantic. That said, the next key economic report worth watching is the UK consumer price index, due for release on Wednesday morning. In terms of expectations, January headline CPI is seen cooling modestly to 10.3% y-o-y from 10.5% in December. The core gauge, for its part, is forecast to clock in at 6.2% y-o-y from 6.3% previously.

Negligible progress in the fight against inflation may add pressure on the Bank of England to reassess its dovish stance adopted this month when the institution abandoned its pledge to continue to raise borrowing costs forcefully.

While policymakers could be compelled to adjust their guidance and keep hiking if inflationary forces don’t abate more rapidly, reactionary monetary tightening will not be sufficient to keep the pound on a recovery path sustainably, particularly if markets doubt the bank will remain steadfast in its commitment to restore price stability. For this reason, it is difficult to be bullish on GBP/USD over the medium term.

GBP/USD Bearish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -2% -3% -2%
Weekly 39% -21% 7%
What does it mean for price action?
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GBP/USD TECHNICAL ANALYSIS

GBP/USD climbed above its 50-day simple moving average on Tuesday, but failed to sustain the breakout decisively, a sign that buying pressure may be easing. With momentum weakening, sellers could wrestle control of the market from bulls any moment, creating the right conditions for a moderate pullback. If the bearish scenario plays out, a retrenchment toward trendline support at 1.2050 seems possible. On further weakness, the focus shifts to the 200-day simple moving average, followed by January’s low. On the contrary, if continue higher and above the 50-day simple moving average, GBP/USD could recapture the psychological 1.2300 level and then 1.2450, which corresponds to the 61.8% Fib retracement of the 2022 sell-off.

GPB/USD TECHNICAL CHART

Chart, histogram  Description automatically generated

GBP/USD Technical Chart Prepared Using TradingView

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

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