GBP/USD - So close yet so far (from 1.30), eyes UK inflation

GBP/USD has been in the hunt for 1.30 over the last two weeks. But time and again the key psychological level has been out of reach of the Sterling bulls.

Retreat from 1.2940 is disheartening

The pair traded around 1.29 handle in the overnight trade after having retreated from the NY session high of 1.2940. The previous day’s daily candle has a long upper shadow, which is always disheartening for the bulls.

UK inflation likely to surge

The UK Office for National Statistics (ONS) data is likely to show inflation surging even higher above the Bank of England's 2% target. The Consumer Price Index (CPI) is seen rising 2.6% y/y in April compared to the previous month’s figure of 2.3%. More importantly, the core inflation is seen rising to 2.2% from 1.8%.

A central bank usually responds to higher inflation by raising rates. However, the BOE made it clear last week that rates could go either way depending on how the Brexit negotiations proceed. The BOE did say that the UK may need higher rates than what the yield curve has priced-in, although, markets did not buy the hawkish sound bite. That is evident from the fact that the Cable remained below 1.30 handle.

Furthermore, the bank also said the inflation is likely to peak at 2.82% in the fourth quarter. There is also marked slowdown in the consumer spending. Consequently, a higher inflation print may not necessarily lead to higher BOE rate hike odds. Almost no one in the market expects the BOE to hike rates this year.

Thus, it would take a higher-than-expected inflation print to push the GBP/USD pair above the 1.30 mark.  On the other hand, a weaker-than-expected print would add credence to the bearish price RSI divergence and may yield a sharp pull back.

GBP/USD Technicals

The daily chart shows a bearish price-RSI divergence. The MACD turned bearish earlier this month. A break below 1.2871 (100% Fib expansion of the March low - March high - April low) would expose 1.2829 (May 4 low) and 1.28 levels. On the higher side, a daily close above 1.30 would open up upside towards 1.3119 (June 2016 low) and 1.32 (zero figure).

Also take note of the golden cross (a lagging indicator!) - Bullish crossover between 50-DMA and 200-DMA.