GBP to USD Forecasts: Hot Inflation to Bring $1.23 into View

It is a busy day ahead for the GBP/USD. UK inflation figures for January will be in the spotlight.

Following the wage growth figures for December, an unexpected pickup in inflationary pressure could corner the BoE into more aggressive policy moves at the expense of the UK economy. In December, average regular pay growth for the private sector was 7.3% in Q4, the most marked outside the pandemic period.

Economists forecast the UK annual inflation rate to soften from 10.5% to 10.3%. However, with the latest wage growth numbers, a modest softening in inflationary pressure will likely keep pressure on the Bank of England.

Last week, Chief Economist Huw Pill pointed out that the Bank must continue to tackle upside inflation risks despite an extended period of weakness in the UK economy. Monetary Policy Committee Member Jonathan Haskel took a more hawkish line, favoring more forceful action. A pickup in wage growth would support Haskel’s more hawkish stance.

With the stats on the heavier side, investors also need to consider Monetary Policy Committee member speeches. However, with no MPC members on the BoE calendar to speak today, investors need to monitor commentary with the media.

GBP/USD Price Action

At the time of writing, the GBP/USD was up 0.01% to $1.21718. A mixed start to the day saw the GBP/USD rise to an early high of $1.021757 before easing back.

Technical Indicators

The Pound needs to move through the $1.2186 pivot to target the First Major Resistance Level (R1) at $1.2254 and the Tuesday high of $1.22699. A return to $1.2250 would signal an extended breakout session. However, the Pound would need economic indicators and hawkish MPC member chatter to support a breakout session.

In the event of an extended rally, the GBP to USD would likely test resistance at $1.23 but fall short of the Second Major Resistance Level (R2) at $1.2339. The Third Major Resistance Level sits at $1.2492.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.2101 in play. However, barring a data-off-fueled sell-off, the GBP/USD should avoid sub-$1.2050 and the second Major Support Level (S2) at $1.2032.

The Third Major Support Level (S3) sits at $1.1879.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bullish signal. The GBP/USD sits above the 50-day EMA, currently at $1.21417. The 50-day EMA narrowed to the 200-day EMA, with the 100-day EMA moving away from the 200-day EMA, delivering bullish signals.

A move through the 200-day ($1.21730) and 100-day ($1.21766) EMAs would support a breakout from R1 ($1.2254) to target $1.23. However, a fall through the 50-day EMA ($1.21417) would support a fall through S1 ($1.2101) to test support at $1.2050.

The US Session

It is a relatively busy day on the US economic calendar. Following the US CPI Report on Tuesday, manufacturing data, industrial production, and retail sales will draw interest. We expect retail sales to have the most influence, however. Retail sales have fallen for two consecutive months. Another monthly fall could reignite fears of a US recession.

With retail sales in focus, investors also need to monitor FOMC member commentary. However, with no members on the calendar, investors need to track chatter with the media.