GBP to USD Forecast: UK Inflation vs. US Retail Sales in the Spotlight

Highlights

• The GBP/USD surged 1.79% on Tuesday, ending the session at $1.24983.
• Elevated UK wage growth and the US CPI report briefly sent the GBP/USD to $1.25.
• On Wednesday, UK inflation and US retail sales figures will be in focus.

The Tuesday GBP/USD Overview

On Tuesday, the GBP/USD surged 1.79%. Following a 0.44% rise on Monday, the GBP/USD ended the day at $1.24983. The GBP/USD fell to a low of $1.22615 before climbing to a high of $1.25058.

UK Inflation in the Spotlight

On Wednesday, UK inflation figures for October will draw investor interest. After the softer but not soft enough wage growth figures for Q3, a marked softening in inflation could fuel bets on an H1 2024 BoE rate cut.

Economists forecast the UK annual inflation rate to soften from 6.7% to 4.8%. However, core inflation could remain a sticking point for the Bank of England. Economists expect core inflation to ease from 6.1% to 5.8%.

Elevated wage growth continues to fuel consumption and demand-driven inflationary pressures. A higher-for-longer BoE rate path could impact borrowing costs and disposable income. Downward trends in disposable income could affect consumer spending and demand-driven inflation.

Last week, Bank of England Governor Andrew Bailey said it was too soon to discuss cutting interest rates. Sticky core inflation would align with the BoE Governor’s outlook on interest rates.

With inflation in the spotlight, investors should monitor BoE commentary. Jonathan Haskel is on the calendar to speak. References to recent stats and interest rates would need consideration.

US Retail Sales and Producer Prices in the Spotlight

On Wednesday, US retail sales numbers for October will draw investor interest. A larger-than-expected fall in sales would support the market bets on the Fed holding interest rates unchanged. Softer US inflation figures closed the door on Fed rate hikes on Tuesday. A slump in retail sales would ease demand-driven inflation, removing the need for a hawkish Fed rate path.

However, weaker-than-expected retail sales numbers could fuel recessionary fears and raise bets on an H1 2024 Fed rate cut.

While retail sales will be the focal point, producer prices will also garner interest. Softer producer prices could reflect a weak demand environment. Producers reduce prices to remain competitive in a low-demand environment. Significantly, producer prices influence consumer price trends.

Economists forecast producer prices to increase 0.1% in October after rising 0.5% in September.

Beyond the numbers, FOMC member Michael Barr is on the calendar to speak. Reaction to recent US Reports will influence the appetite for the US dollar.

Short-Term Forecast

Near-term trends for the GBP/USD hinge on the UK inflation and US retail sales figures. A robust US economy vs. a deteriorating UK macroeconomic environment could suggest a BoE first move to cut rates. However, a slump in US retail sales could rattle the appetite for the US dollar.

GBP to USD Price Action

Daily Chart

The GBP/USD sat above the 50-day and 200-day EMAs, sending bullish price signals.

A GBP/USD break below the $1.24410 support level would bring the EMAs into play.

UK inflation and US retail sales figures will dictate GBP/USD price movements.

However, a GBP/USD return to $1.25000 would support a move toward the $1.28013 resistance level. Hotter-than-expected UK inflation numbers and a slide in US retail sales would drive buying appetite for the GBP/USD.

The 14-period daily RSI reading of 66.04 indicates a GBP/USD move to $1.25500 before entering overbought territory.

4-Hourly Chart

The GBP/USD remained above the 50-day and 200-day EMAs, the EMAs affirming bullish price signals. Notably, the 50-day EMA crossed through the 200-day EMA, another bullish price signal.

A GBP/USD return to $1.25 would give the bulls a run at the $1.28013 resistance level.

However, a break below the $1.24410 support level would bring the EMAs into play.

The 14-period RSI on the 4-hour Chart at 79.33 shows the GBP/USD in overbought territory. Selling pressure will likely intensify at $1.25.