GBP/USD recovery to gain momentum on strong UK CPI

The greenback traded lower against the British Pound and the shared currency as Monday's weak US manufacturing data raised skepticism over expectations of the Fed interest rate hike action before the end of this year. According to the data released on Monday, Empire State Manufacturing index unexpectedly dropped to -6.8, indicating contraction in manufacturing activity in the New-York area for the second straight month, while another report showed US Industrial Production increased only marginally in September.

The GBP/USD pair rebounded from weekly bearish gap opening but still ended on the back-foot as weekend comments from German Chancellor Angela Merkel and French President François Hollande continued fueling concerns of a 'hard Brexit' and weighing on the British Pound. From the Euro-zone, the final CPI print for September came-in at 0.4% y-o-y and core CPI at 0.8% y-o-y.

Inflation data, as measured by Consumer Price Index (CPI), from UK and the US will be key highlight from today's economic docket. A higher-than-expected pick-up in UK inflation would support BOE officials view of overshooting the inflation target, would ease bearish sentiment surrounding the British Pound and trigger a sharp short-covering rally around the GBP/USD major. Investors this week will also confront important UK macroeconomic data, which include jobs report and monthly retail sales figures, due later in the week.

Technical outlook

GBP/USD

On 4-hourly chart, the pair seems to have entered consolidation phase within a rectangular chart pattern and is now reversing from the top end of the consolidative range. Hence, it would be prudent to wait for a decisive move out of this trading range in order to determine the pair’s next leg of directional move.

From current levels, weakness below 1.2200-1.2195 immediate support would reaffirm near-term range-bound price action and drag the pair to lower end support near 1.2130-25 region.

On the upside, 1.2265-70 area remains immediate strong hurdle, which if conquered should lift the pair immediately beyond 1.2300 handle towards its next resistance near 1.2375 region marking 50% Fibonacci retracement level of 1.2771-1.1980 recent slide.

EUR/USD

The pair’s recovery momentum from 1.0970-60 strong horizontal support might now confront resistance at 1.1050 level above which a bout of short-covering is likely to boost the pair beyond 1.1100 handle towards an important support break, now turned resistance, near 1.1120-25 area.

On the flip side, sustained weakness back below 1.1000 psychological mark is likely to drag the pair back towards 1.0970-60 support, which if broken might turn the pair vulnerable to retest Brexit swing lows support near 1.0910-1.0900 round figure mark.