GBP/USD Retreats Towards Range Support As the Dollar Continues to Gain

GBP/USD declined sharply in early European trading yesterday but has since fallen into a range, holding above a critical support level.

A break lower from here could signal a trend reversal from the uptrend that had started back in March.

Two economic releases stand to have a major influence on the currency pair over the near-term. CPI data from the US and quarterly GDP figures from the UK.

The CPI data will be reported later today and analysts are expecting a modest decline in core CPI which strips away the volatile fluctuations from food and energy prices. The headline CPI figure is expected to have declined 0.7% last month, weighed not only by the Coronavirus but also the drop in oil prices.

Considering that the markets have shown a minimal reaction to recent US jobs data and last week’s PMI figures, a volatile reaction to the CPI report seems unlikely.

The GDP data from the UK, however, stands to be a market mover. While the data release on its own is expected to show a notable contraction in economic growth, the importance of the report is its monetary policy implications.

Two members of the BoE voted to increase the size of the bank’s bond-purchasing program last week which signals that there could be more monetary easing on the way. BoE Governor Bailey spoke after the monetary policy meeting last week and also hinted that the bank could ease further in June.

While there is no certainty as to what the BoE will do at their next meeting, a weak UK GDP report increases the chances of more easing which stands to put pressure on the exchange rate.

Technical Analysis

Volatility has dropped off in GBP/USD since the end of March and a range has been playing out since.

The pair made two attempts at the 200-day moving average last month, both unsuccessful. This seems to be setting up a possible double top pattern with important range support at 1.2266.

If the pair breaks below support, the technical pattern implies a downside target of 1.1890.

The exchange rate might require a catalyst for a break lower, especially considering that the dollar index (DXY) has also been contained within a range over the last month.

It will likely require a push above resistance at 1.2426 to encourage bulls at this stage.

Bottom Line

• GBP/USD is on the verge of a break lower from a double top pattern.
• Today’s CPI data and tomorrow’s UK GDP figures stand to influence whether the pair breaks down from this important technical area.