GBP/USD Forecast: Pound Sterling to break out of range on US inflation data

GBP/USD has been struggling to make a decisive move in either direction.
December inflation data from the US could trigger the next big action in the pair.
Near-term trading range seems to have formed between 1.2140 and 1.2200.

Eren Sengezer FXStreet

GBP/USD has extended its sideways grind following Wednesday's choppy action and was last seen trading at around 1.2150. December inflation data from the US could significantly influence the US Dollar's valuation and provide a direction clue to the pair in the second half of the day.

On Wednesday, the US Dollar failed to stage a rebound as Wall Street's main indexes continued to push higher after having closed in positive territory on Tuesday. Nevertheless, GBP/USD action remained limited with investors refraining from making large bets ahead of the Consumer Price Index (CPI) data.

Rather than the headline annual CPI print, investors are likely to react to the monthly Core CPI reading, which excludes volatile food and energy prices and is not impacted by the base effect. Markets expect the monthly core inflation to rise by 0.3% following November's 0.2% increase. The market reaction should be straightforward with a smaller-than-expected increase weighing on the US Dollar and vice versa.

The sharp decline seen in the Prices Paid component of the ISM's Services December PMI report last week and the soft wage inflation may have caused some investors to price in a weak CPI print. However, with the CME Group FedWatch Tool still showing a more-than-20% probability of a 50 basis points Fed rate hike in February, there is more room for further US Dollar weakness rather than a "buy the rumor sell the fact" reaction.

GBP/USD Technical Analysis

The near-term technical outlook suggests that GBP/USD's bullish bias stays intact with the Relative Strength Index (RSI) indicator on the four-hour chart holding comfortably above 50. On the upside, interim resistance seems to have formed at 1.2170 before 1.2200 (psychological level, Fibonacci 61.8% retracement of the latest downtrend). In case the latter is confirmed as support, the pair could target 1.2260 (static level) next.

1.2140 (Fibonacci 50% retracement, 200-period Simple Moving Average (SMA)) aligns as critical support. If that level fails, GBP/USD could continue to push lower toward 1.2100 (psychological level, static level) and 1.2070 (100-period SMA, 50-period SMA Fibonacci 38.2% retracement).

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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