GBP/USD Daily Forecast – Inflation Beat Lifts Sterling

UK Data Mostly Better Than Expected

GBP/USD rallied a bit ahead of the data release and then spiked higher on data that mostly exceeded expectation. The pair ran into some resistance around 1.12580 and seems to be consolidating below it.

Quick take

• Headline CPI rose 2% in the year to May. This was in line with expectations and a tick lower than the prior release.
• Core CPI rose 1.7% in the same time period. It was a tick above the analyst estimate for a rise of 1.6% and a tick below the prior release.
• Downward pressure from transportation, particularly airfares as well as declining car prices.

The UK house price index was reported to rise 1.4% in the year to April, it was the first time the report beat analyst expectations in six months. Producer price input fell short in May while output exceeded expectations.

Inflation data is important considering they are the only major economy that is seeing inflation holding towards 2%, and as a result, the only economy considering a rate hike. This will especially be important later today when the Federal Reserve meets.

High expectations for a Dovish Fed

Today’s meeting will show whether the markets have gotten ahead of themselves by pricing in two rate cuts this year in the United States, or if the Fed is on board.

There is little expectation for policymakers to make a move today, with the Fed Funds Futures pricing only a 20% probabilities for most of the week thus far.

GBP/USD can potentially reverse from here, but it will take a more dovish Fed than what the markets are expecting, which right now, seems like a tall tale.

Aside from the Fed meeting, GBP/USD will also see volatility on Thursday as the Bank of England is scheduled to hold their monetary policy meeting.

Technical Analysis

GBP/USD is already seen facing some resistance at 1.2580. This level marks support that held the pair higher on a 4-hour basis in May. Just above it, I see further resistance at 1.2603. This level has recently been respected as support and resistance and also carries confluence with the 100 moving average on an hourly chart.

The pair has broken out from a declining trend channel that extends back to last weeks high. This seems to suggests some reversal potential while the pair remains above recent lows near the 1.2500 handle.

If the pair turns, I see support at 1.2486 as this level held the pair higher last year, on a daily basis. In the event of a rally I see major resistance at 1.2655. This not only marks the breakout point of a prior double top pattern, it also confluences with the 100 moving average on an hourly chart.

Bottom Line

• The Fed meeting will deliver volatility. It can be a bumpy ride for GBP/USD traders over the next 24 hours or so.
• Major upside resistance falls at 1.2655
• A break of 1.2521 support exposes 1.2486.