GBP/USD Forecast: 1.2050 support could fail on strong US Core CPI

GBP/USD has gone into a consolidation phase near 1.2100 as market participants get ready for the highly-anticipated July Consumer Price Index (CPI) figures from the US. 

Following the Fed's decision to abandon rate guidance and become data-dependent, the market pricing of the size of the Federal Reserve's next rate increase could be impacted in a meaningful way on US data. As it currently stands, there is a 66.5% probability of the Fed hiking by 75 basis points in September. Although this market positioning suggests that the reaction to soft inflation data is likely to be more significant than a strong one, a dollar rally shouldn't be ruled out, especially if the Core CPI comes in higher than analysts' forecast.

The market expectation is for the annual Core CPI to edge higher to 6.1% from 5.9% in June on a 0.5% increase on a monthly basis. The headline annual inflation is estimated to drop to 8.7% from 9.1% in the same period but a modest decline shouldn't be surprising due to the base effect. 

US July CPI Preview: What is the base effect and why it matters.

An unexpected fall in the Core CPI reading could trigger a dollar selloff and open the door for a decisive recovery in GBP/USD. With the UK economy facing a high risk of recession before the end of the year, however, investors could refrain from betting on long-term GBP strength and key technical levels could cap the pair's upside in the near term. 

GBP/USD Technical Analysis

1.2050 (Fibonacci 50% retracement of the latest uptrend, 200-period SMA on the four-hour chart) aligns as key support for GBP/USD. With a four-hour close below that level, additional losses toward 1.2000 (psychological level, Fibonacci 61.8% retracement) and 1.1920 (static level) could be witnessed.

On the upside, the pair could target 1.2150 (50-period SMA) and 1.2175 (Fibonacci 23.6% retracement) if buyers managed to flip 1.2100 (psychological level, Fibonacci 38.2% retracement, 100-period SMA) into support.