GBP/USD Daily Forecast – Sterling Falls Back as Dollar Recovers

GBP/USD Rally Capped By Resistance

A resistance level at 1.2570 has held the recovery in GBP/USD in the week thus far. Yesterday’s data release suggests the pair might struggle to move higher from here, at least in the near-term.

Both CPI and Core CPI were reported to rise higher than expected in yesterday’s inflation report. This somewhat counters dovish rhetoric from Powell’s testimony this week. At the same time, the futures markets are regaining confidence in pricing easing expectations.

Last week, the CME FedWatch Tool showed that the markets had essentially given up on the idea of a 50 basis point cut at the next Federal Reserve meeting. Over the past few days, the probabilities have started to ease higher and the odds currently stand at about a 1 in 5 chance for an aggressive cut later this month.

Price action in the dollar seems to suggest something a bit different. A recovery in the dollar index (DXY) on the back of yesterday’s inflation data has led to a doji pattern in the index on a daily chart. The same pattern can be seen in EUR/USD. In the currency pair, the doji reflects a failed break above its 100-day moving average.

Technical Analysis

The daily print in GBP/USD does indicate some selling pressure but does not qualify as a reversal or exhaustion pattern.

GBP/USD turned lower from resistance at 1.2570 yesterday. This level held the exchange rate higher in May and also provided support ahead of last weeks NFP report.

The rejection that followed a test of the level resulted in a bearish engulfing candle on a 4-hour chart. In early trading on Friday, the pair is attempting to form an evening star pattern. The combination of these two patterns and the resistance overhead suggests the pair might struggle to move higher in the session ahead.

Over a slightly broader time frame, the psychological 1.2500 handle to the downside will be important in assessing if the current recovery will be sustained.

Bottom Line

• GBP/USD has eased back after hitting resistance at 1.2570.
• Yesterday’s CPI report dampens the near-term outlook for dollar bears.