GBP/USD Outlook: Post-UK CPI slump favours bearish traders amid recession fears

The GBP/USD pair struggled to capitalize on its recent bounce from the lowest level since May 2020 and faced rejection near the 1.2500 psychological mark, or almost a two-week high touched earlier on Wednesday. The downfall marked the first day of a negative move in the previous four sessions and was sponsored by a combination of factors. The British pound weakened across the board after data released from the UK showed that consumer inflation soared to a 40-year high of 9% in April. Given that the UK economic activity had slowed sharply during the first quarter, the data-fueled fears about stagflation. This comes from strong wage growth figures released on Tuesday and suggests that inflationary pressures are likely to continue. The UK-EU impasse over the Northern Ireland protocol also exerted additional downward pressure on the sterling.

On Tuesday, the British government announced a bill that would effectively override parts of a Brexit deal.nnnn The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with a plan to rewrite the NI protocol. The developments fueled fears that the legislation - if passed - would trigger a trade war in the middle of the cost-of-living crisis and take its toll on the UK economy. This, in turn, validated the Bank of England's gloomy outlook, which, along with resurgent US dollar demand, prompted aggressive selling around the major. The greenback made a solid comeback and stalled its corrective pullback from a two-decade high amid expectations that the Fed would need to take more drastic action to bring inflation under control. The bets were reaffirmed by Fed Chair Jerome Powell's hawkish remarks on Tuesday.

Speaking at a Wall Street Journal event, Powell said he would back interest rate increases until prices start falling back toward a healthy level. This, in turn, lifted the yield on the benchmark 10-year US government bond back closer to the 3.0% threshold and underpinned the USD. Meanwhile, the US central bank's determination to fight inflation comes amid concerns that the Russia-Ukraine war and extended COVID-19 lockdowns in China would continue to push consumer prices higher. Furthermore, signs of softening global economic growth further fueled recession fears and triggered a fresh bout of the risk-aversion trade. The anti-risk flow was seen as another factor that boosted the safe-haven buck. The GBP/USD pair tumbled around 170 pips intraday and finally settled near the daily low, though it attracted some buying during the Asian session on Thursday.

In the absence of major market-moving economic releases from the UK, the USD price dynamics would continue to play a key role in influencing the GBP/USD pair. Later during the early North American session, traders will take cues from the US economic docket - featuring Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Existing Home Sales data. The US bond yields and the broader market risk sentiment would drive the USD demand and provide some meaningful impetus to the major.

Technical outlook

From a technical perspective, the pair on Wednesday failed near the 38.2% Fibonacci retracement level of the 1.3090-1.2156 steep decline. The subsequent fall below the 100-period SMA on the 4-hour chart and the 23.6% Fibo. level might have shifted the bias back in favour of bearish traders. That said, the emergence of some dip-buying on Thursday warrants some caution. Nevertheless, the set-up supports prospects for the resumption of the downtrend witnessed over the past one month or so. Hence, a slide back below the 1.2300 mark towards testing the next relevant support near the 1.2265 region remains a distinct possibility. Some follow-through selling should allow additional losses and drag spot prices further towards the 1.2200 round figure en route to the YTD low, around the 1.2155 region touched last week.

On the flip side, momentum back above the 1.2400 mark now seems to confront stiff resistance near the 1.2430-1.2435 region. Any further move up should attract fresh selling and remain capped near the 1.2500 mark, which should now act as a pivotal point. Sustained strength beyond would suggest that the GBP/USD pair has formed a near-term bottom and trigger a short-covering rally. Spot prices could then climb to the 1.2570-1.2575 intermediate hurdle en route to the 1.2600 mark and the 50% Fibo. level, around the 1.2630-1.2635 zone.