GBP/USD Forecast: Rate cut speculations, Brexit uncertainties to cap the ongoing recovery

  • GBP/USD reversed Wednesday’s softer UK CPI-led intraday dip.
  • The prevailing USD selling bias helped regain positive traction.
  • The upside is likely to remain capped amid Brexit uncertainties.

The GBP/USD pair witnessed some intraday selling on Wednesday and weakened back below the key 1.30 psychological mark following the release of softer UK consumer inflation figures. In fact, the headline UK CPI unexpectedly eased to a three-year low, at 1.3% annualized pace in December from 1.5% previous. Adding to this, the core CPI (excluding food and energy prices) also fell short of market expectations and held flat during the reported month and rose 1.4% from a year earlier.

Bulls shrug off a combination of negative factors

The British pound was further weighed down by some dovish comments by the BoE policymaker Michael Saunders, saying that an interest rate cut could be appropriate amidst the current economic conditions and the slowdown in the labour market. The market started pricing in the likelihood of a potential change in the BoE's monetary policy stance at the upcoming meeting on January 30, which eventually dragged the pair to daily lows, around the 1.2985 region.

However, a mildly weaker tone surrounding the US dollar extended some support, rather assisted the pair to reverse an early dip. The USD bulls seemed rather unimpressed by the conclusion of the long-awaited US-China phase-one trade deal. Nevertheless, the pair settled near the top end of its daily trading range and edged higher for the third consecutive session on Thursday, though concerns that the UK might crash out of the European Union at the end of this year might keep a lid on any strong follow-through positive move.

Moving ahead, there isn't any major market-moving economic data due for release from the UK on Thursday and hence, the key focus will remain on any Brexit-related headlines, which might continue to act as a key determinant of the broader sentiment surrounding the sterling. Later during the early North-American session, the release of the US monthly retail sales data might influence the USD price dynamics and further contribute towards producing some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the pair has been recovering from support marked by the lower end of a near three-week-old descending trend-channel. Any subsequent move up is likely to confront some fresh supply near the trend-channel resistance, around the 1.3085 region. The latter coincides with 200-period SMA on the 4-hourly chart and should act as a key pivotal point for short-term traders. Above the mentioned confluence barrier, the pair is likely to surpass the 1.3100 handle and accelerate the momentum towards the 1.3165-70 supply zone. Some follow-through buying has the potential to lift the pair further towards reclaiming the 1.3200 round-figure mark, en-route mid-1.3200s and the recent swing high resistance near the 1.3285 region.

On the flip side, immediate support is now pegged near the 1.2990-85 region, below which the pair is likely to fall further towards challenging the trend-channel support, currently near the 1.2900 round-figure mark. Failure to defend the mentioned support might turn the pair vulnerable to fall further towards the 1.2825 horizontal support before eventually breaking below the 1.2800 handle towards testing early November swing lows support near the 1.2770-65 region.


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