GBP/USD Outlook: Pullback from post-US CPI swing high warrants caution for bulls

The GBP/USD pair caught aggressive bids and rallied to over a one-week high, around the 1.2275 region on Wednesday amid the softer US consumer inflation figures-led US dollar slump. The Bureau of Labour Statistics reported that the headline US CPI was unchanged on a monthly basis in July and the yearly rate decelerated to 8.5% from 9.1% in June. Adding to this, core inflation, which excludes food and energy prices, rose 0.3% MoM and held steady at the 5.9% YoY rate during the reported month. The readings were below market expectations and fueled speculations for a less aggressive rate hike by the Federal Reserve. The odds for a 75 bps Fed rate hike in September tumbled from 80% pre-CPI, which triggered a steep decline in the US Treasury bond yields and weighed heavily on the buck. The strong overnight rally in the US equity markets also dragged the safe-haven USD to its lowest level since late June.

That said, growing worries about a global economic downturn and the US-China tensions over Taiwan kept a lid on the optimistic move. Furthermore, hawkish comments by several Fed officials helped ease the bearish pressure surrounding the USD and forced the GBP/USD pair to trim a part of its intraday gains. St. Louis Fed President James Bullard said it was too early to claim inflation has peaked and still wants interest rates to get to the 3.75%-4.00% range by the end of the year. Separately, Chicago Fed President Charles Evans noted that inflation is still unacceptably high and expects Fed to continue to raise the interest rate to 3.25-3.50% by year-end, and to 3.75-4.00 by the end of next year. Adding to this, Minneapolis Fed President Neel Kashkari said that the Fed is far from declaring victory on inflation and recommended an interest rate of 3.9% by the end of this year, and 4.4% next in the June economic projections.

This, along with the Bank of England's gloomy economic outlook, acted as a headwind for the British pound and attracted some sellers around the GBP/USD pair at higher levels. It is worth recalling that the UK central bank last week indicated that a prolonged recession would start in the fourth quarter. Hence, the market focus now shifts to the Preliminary UK GDP report for the second quarter, due for release on Friday. Nevertheless, spot prices retreated around 70 pips from the post-US CPI swing high and edged lower through the Asian session on Thursday amid a modest pickup in the USD demand. In the absence of any major market-moving economic releases from the UK, the pair remains at the mercy of the USD price dynamics. Later during the early North American session, traders would take cues from the US Producer Price Index (PPI). Apart from this, the broader risk sentiment would drive the USD demand and provide some impetus to the major.

Technical Outlook

From a technical perspective, the solid overnight move stalled ahead of the monthly peak. A subsequent slide below the 1.2200 mark, or the 50% Fibonacci retracement level of the May-July downfall warrants caution for bullish traders. Any further decline, however, is likely to find some support near the 1.2160-1.2155 horizontal zone, below which spot prices could drop back to the 1.2100 mark. The latter coincides with the 38.2% Fibo. level and should act as a pivotal point. Some follow-through selling would make the GBP/USD pair vulnerable to weaken below the 1.2065 intermediate support and test the post-BoE swing low, around the 1.2000 psychological mark.

On the flip side, the immediate hurdle is pegged near the 1.2245 area ahead of the 1.2275-1.2280 region and the 1.2295 zone (August 1 high). This is closely followed by the 61.8% Fibo. level, just above the 1.2300 round figure, which if cleared decisively would set the stage for a further near-term appreciating move. The GBP/USD pair could then accelerate the momentum towards reclaiming the 1.2400 mark before eventually aiming to the 100-day SMA, currently around the 1.2430 region.