GBP to USD Forecasts: Return to Sub-$1.22 Hinged on the CPI Report
It is another busy day ahead for the GBP/USD. Following the wage growth and unemployment numbers on Tuesday, UK inflation will be in the spotlight today.
For the Bank of England and monetary policy, a larger-than-expected pickup in inflation will be a concern. Today’s inflation numbers will need to be softer to ease pressure on the Monetary Policy Committee to respond with a more aggressive February policy move.
Economists forecast the UK annual inflation rate to soften from 10.7% to 10.5% in December.
While the stats will provide direction, investors should also consider Monetary Policy Committee member commentary. With no members speaking today, chatter with the media could move the dial.
Brexit is another curveball for investors, with EU and UK negotiators back at the table this week. Northern Ireland and the Northern Ireland Protocol will remain the focal point, with the UK government looking to build better relations with the EU in the interest of the UK economy.
While better relations may be the preferred option for some, another Brexit rebellion could refuel political instability and Tory party infighting, a negative for the Pound.
GBP/USD Price Action
At the time of writing, the Pound was down 0.07% to $1.22764. A mixed start to the day saw the GBP/USD fall to a low of $1.22684 before rising to a high of $1.22898.
The Pound needs to avoid the $1.2251 pivot to target the First Major Resistance Level (R1) at $1.2334. A move through the Tuesday high of $1.23006 would signal a bullish session. However, the Pound would need risk-on sentiment and an unexpected pickup in inflation to support another breakout session.
In the event of an extended rally, the GBP to USD would likely test the Second Major Resistance Level (R2) at $1.2383 and resistance at $1.24. The Third Major Resistance Level sits at $1.2515.
A fall through the pivot would bring the First Major Support Level (S1) at $1.2202 into play. However, barring a data-fueled sell-off, the GBP/USD should avoid sub-$1.2150 and the Second Major Support Level (S2) at $1.2120.
The Third Major Support Level (S3) sits at $1.1988.
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 $1.21755. The 50-day EMA pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.
A hold above S1 ($1.2202) and the 50-day EMA ($1.21755) would support a breakout from R1 ($1.2334) to target R2 ($1.2383) and $1.24. However, a fall through S1 ($1.2202) and the 50-day EMA ($1.21755) would bring the 100-day EMA ($1.21393) and S2 ($1.2120) into view. A fall through the 50-day EMA would send a bearish signal.
The US Session
It is a busier day ahead on the US economic calendar, with wholesale inflation, retail sales, and industrial production in focus. Barring dire industrial production numbers, wholesale inflation and retail sales will likely have more impact.
A pickup in wholesale inflationary pressure and a slide in retail sales would be a risk-off combination.
Beyond the economic indicators, investors should also monitor FOMC member commentary. However, members would need to talk about a 50-basis point interest rate hike or a pause on lifting rates to move the dial.