GBP/USD Forecast: Pound Sterling retreats after testing key resistance on UK inflation
- GBP/USD climbed to a fresh multi-year high above 1.3450 on Wednesday.
- Annual CPI inflation in the UK rose to 3.5% in April from 2.6% in March.
- The pair's bullish stance remains intact despite recent pullback.
GBP/USD gathered strength in the European morning on Wednesday rose to its highest level since February 2022 near 1.3470. Although the pair loses its traction following the initial upsurge, the technical outlook suggests that the bullish bias remains unchanged.
British Pound PRICE This week
The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the strongest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -1.25% | -0.89% | -0.84% | -0.58% | -0.59% | -0.80% | -1.37% | |
| EUR | 1.25% | 0.34% | 0.47% | 0.73% | 0.79% | 0.51% | -0.11% | |
| GBP | 0.89% | -0.34% | -0.17% | 0.40% | 0.45% | 0.17% | -0.45% | |
| JPY | 0.84% | -0.47% | 0.17% | 0.26% | 0.41% | 0.23% | -0.48% | |
| CAD | 0.58% | -0.73% | -0.40% | -0.26% | 0.00% | -0.22% | -0.84% | |
| AUD | 0.59% | -0.79% | -0.45% | -0.41% | -0.00% | -0.28% | -0.89% | |
| NZD | 0.80% | -0.51% | -0.17% | -0.23% | 0.22% | 0.28% | -0.62% | |
| CHF | 1.37% | 0.11% | 0.45% | 0.48% | 0.84% | 0.89% | 0.62% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
The UK's Office for National Statistics (ONS) reported on Wednesday that annual inflation in the UK, as measured by the change in the Consumer Price Index (CPI), climbed to 3.5% in April from 2.6% in March. This reading came in above the market expectation of 3.3%. Additionally, the CPI rose by 1.2% on a monthly basis after increasing by 0.3% in March, while the core CPI, which excludes volatile food and energy prices, increased by 3.8% on a yearly basis.
Hot inflation data boosted Pound Sterling with the immediate reaction, as markets scaled down bets of a Bank of England (BoE) rate cut in August. According to Reuters, investors now see a 45% chance of the BoE cutting rates at the August policy meeting, compared to a 60% chance on Tuesday.
In the meantime, the US Dollar (USD) struggles to find demand midweek as markets turn pessimistic about the US and China making progress in trade talks. China’s Commerce Ministry defined the United States' measures on China’s advanced chips as "typical of unilateral bullying and protectionism," and accused the US of violating international law by abusing export controls to contain and suppress China.
Ahead of Thursday's key Purchasing Managers Index (PMI) data releases from the UK and the US, market participants will continue to scrutinize geopolitical developments. A further deterioration of US-China relations could put additional weight on USD's shoulder and help GBP/USD gather bullish momentum.
GBP/USD Technical Analysis
GBP/USD edges lower following the decisive jump seen in the immediate aftermath of the UK inflation data. Nevertheless, the Relative Strength Index (RSI) indicator on the 4-hour chart remains slightly above 60 after touching 70 earlier in the day, suggesting that the recent pullback is a technical correction and that the bullish stance remains intact.
On the upside, 1.3440 (upper limit of the latest uptrend) aligns as first resistance before 1.3500 (static level, round level) and 1.3550 (static level). Looking south, supports could be spotted at 1.3400-1.3390 (former resistance, static level), 1.3315 (100-period SMA), and 1.3270 (Fibonacci 23.6% retracement of the latest uptrend).
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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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.
