GBP/USD Forecast: Bears regaining control ahead of UK CPI release

Political developments in UK over the weekend heightened fears of Brexit and kept Cable under pressure throughout yesterday’s European session. The offered tone around GBP was accompanied by unwinding of dollar shorts in the NY session after Fed policymakers, via their mildly hawkish comments, indicated a possibility of sooner than expected rate hike.

As early as last week, Fed killed rate hike bets by stating it now sees only two rate hikes happening this year. However, within one-week Fed policymakers are out on the wires talking up rate hike bets. Fed’s Williams downplayed soft inflation expectations and said rate hikes could happen soon (April/June) given the encouraging data.

Consequently, GBP/USD closed on a weaker note at 1.4367, which means the spot has re-entered symmetrical triangle formation seen on the daily chart. The currency pair regained poise in Asia, but the momentum looks weak, given it is struggling to cut through 1.44 handle.

Weaker core CPI could hurt Sterling

Cost of living as measured by consumer price index (CPI) is due for release in the UK. The headline figure is seen rebounding 0.4% m/m in Feb. The annualized figure is seen coming in at 0.4%. An upbeat headline figure is welcome news, but the real test would be core CPI, which is seen unchanged at 1.2% y/y.

The headline has been under pressure mainly due to energy price slide and given the recovery in oil in February, a rebound in headline inflation would not be surprising. Hence, core CPI is likely to get more attention. A weaker-than-expected print could push Cable down to 5-DMA support around 1.4338. On the other hand, a combination of strong headline figure and core figure could result in another attempt to cut through offers around 1.45 handle.

Technicals – increased odds of a drop 38.2% fibo support

• Sterling’s daily close back inside symmetrical triangle on the daily chart after multiple failed attempts to take out 1.45 hurdle has left the doors open for a drop to 1.4338, which is 38.2% Fibo of 1.4053-1.4515.

• Pair breached falling channel seen on 15-min chart during the NY session, but has failed to capitalize on the bullish break and finds itself stuck below 1.44 handle. Repeated failure to take out 1.4394 (5-DMA) would add to bearish tone around Sterling.

• A break above 1.4405 (23.6% of 1.4053-1.4515) would shift risk in favor of a re-test of 1.4473 (76.4% of 1.4669-1.3835) – 1.45 levels.

• However, fresh bids are seen coming-in only if the spot sees a convincing break above 1.45 handle, in which case hurdles at 1.4533 and 1.4578 could be put to test.