GBP/USD Forecast: Is the pound recovery over already?

GBP/USD has lost its traction after having tested 1.2500.
A four-hour close below 1.2400 could be seen as a bearish development.
Inflation in the UK rose to its highest level in more than two decades.

Eren Sengezer FXStreet

GBP/USD has lost its traction early Wednesday and erased a large portion of Tuesday's impressive gains. The pair trades below the key 1.2400 level and additional losses could be witnessed in case this level is confirmed as resistance.

The data published by the UK's Office for National Statistics revealed on Wednesday that annual inflation, as measured by the Consumer Price Index (CPI), jumped to its highest level in more than two decades at 9% in April. This print, however, came in slightly lower than the market forecast of 9.1%. Additionally, the Core CPI, which excludes volatile food and energy prices, rose to 6.2% from 5.7% as expected.

It's worth noting that the majority of the rise in inflation in April was caused by the UK energy regulator increasing the energy price cap for households by 54%. Hence, investors might be assessing that inflation may have peaked in April. In such a scenario, the Bank of England (BOE) could opt to put more emphasis on supporting economic growth rather than taming inflation.

In the second half of the day, April Housing Starts and Building Permits data will be featured in the US economic docket. Nevertheless, the risk perception is likely to continue to impact the dollar's market valuation.

US stock index futures were last seen losing between 0.3% and 0.75% on the day, suggesting that the dollar could capitalize on safe-haven flows in the second half of the day and force GBP/USD to stay on the back foot.

GBP/USD Technical Analysis

GBP/USD is trading below the key 1.2400 level, where the Fibonacci 23.6% retracement of the downtrend that started on April 21 and the 100-period on the four-hour SMA is located. In case this level is confirmed as resistance, the pair could suffer additional losses toward 1.2340 (20-period SMA) and 1.2300 (psychological level, static level, 50-period SMA).

On the upside, bulls could show interest if GBP/USD manages to stabilize above 1.2400. In that scenario, the pair needs to clear 1.2450 (static level) in order to test 1.2500 once again.

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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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