GBP/USD Forecast: Pound Sterling could test 1.2600 after US data

GBP/USD turned north following Monday's deep downward correction.
Hot wage inflation data from the UK provided a boost to Pound Sterling early Tuesday.
Eyes on May Consumer Price Index data from the US.

Eren Sengezer FXStreet

GBP/USD lost more than 50 pips on Monday but gathered bullish momentum early Tuesday. The pair could stretch higher toward 1.2600 later in the day in case May inflation data from the US causes the US Dollar (USD) to stay under selling pressure.

In the absence of high-tier data releases on Monday, GBP/USD came under technical bearish pressure as markets reacted to overbought conditions.

Pound Sterling, however, attracted buyers in the European morning on Tuesday. Wage inflation in the UK, as measured by Average Earnings Excluding Bonus, climbed to 7.2% on a yearly basis in April from 6.8% in March, the Office for National Statistics reported. With this reading surpassing the market expectation of 6.9%, hawkish Bank of England (BoE) bets started to dominate the market action, providing a boost to GBP/USD. At the time of press, the 2-year UK gilt yield was up more than 10 basis points on the day at 4.75%.

In the second half of the day, the Consumer price Index (CPI) data for May will be watched closely by market participants ahead of the Federal Reserve's policy announcements on Wednesday.

The monthly Core CPI, which excludes prices for volatile items and is not distorted by the base effect, is expected to rise 0.4% in May. With a smaller-than-forecast increase, markets could continue to price in a no change in the Fed's policy rate and highlight the policy divergence between the Fed and the BoE, allowing GBP/USD to stretch higher. On the flip side, a reading at or above 0.5% should help the USD to turn resilient against its peers and cap GBP/USD's upside.

GBP/USD Technical Analysis

GBP/USD trades in the upper-half of the two-week-old ascending regression channel and the Relative Strength Index (RSI) indicator stays comfortably above 50, reflecting the bullish bias.

On the upside, 1.2600 (static level, upper-limit of the ascending channel) aligns as strong resistance. A four-hour close above that level could open the door for additional gains toward 1.2650 (static level, beginning point of the latest downtrend).

In case GBP/USD returns within the lower-half of the ascending channel by stabilizing below 1.2560, 1.2520 (Fibonacci 61.8% retracement of the latest downtrend) could be seen as the next support ahead of 1.2500 (psychological level).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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