GBP/USD Daily Forecast – UK Inflation Rates Rebound Sharply Higher in January

Consumer prices in the UK rose sharply on an annual basis while declining 0.2% on a month over month basis. CPIH, which includes owner occupier’s housing costs, rose 1.8% in the year to January, up from 1.4% in the prior reading. The largest contribution to the annual rise came from housing and household services.

GBP/USD ran into resistance yesterday at 1.3050 and has retreated back towards the 1.3000 handle. The upside inflation data surprise provided a momentary reprieve for the exchange rate but the pair appears to be struggling to hold above the psychological 1.3000 handle.

A stronger US dollar is one component weighing on the pair. The US Dollar index has only shown losses in two out of the last 12 sessions and is nearing its 2019 high.

Later in the North American session, PPI and housing data will be released from the US and Fed members Mester and Kashkari are expected to speak.

The decline in equities on the back of Apple’s earnings warning might have been a short one. Most of the global indices are recovering in the early day to wipe out a bulk of Tuesday’s decline. The UK FTSE 100 is outperforming in the early day and has entered positive territory for the week.

Technical Analysis

A barrier at 1.3050 has held GBP/USD lower on several attempts since last week. The horizontal level carries confluence with the 50-day moving average and bears have done a good job of defending it.

While below the level, bears will be encouraged, especially considering the bearish engulfing weekly candle printed early in the month.

In the near-term, the focus will tend to be on the 1.3000 level. The pair is currently struggling to hold above it despite today’s positive data which builds towards a bearish case. A recovery back above today’s high near 1.3020 will tend to shift the momentum.

Further support for the pair is seen at 1.2961. This level acted as major support last month and was also a notable barrier for most of the fourth quarter.

Bottom Line

• UK inflation rebounded sharply higher in the year to January, however, Sterling has struggled to gain following the report.
• The dollar continues to show strength and is nearing its 2019 high.