Following a 0.7% dip on Tuesday, the GBPUSD currency pair staged a comeback on Wednesday, fuelled by the UK’s latest inflation report. With the UK marking its first inflation uptick in ten months, the results surpassed expectations, challenging the notion of imminent rate cuts by the Bank of England in its monetary policy stance. Year-over-year inflation surged to 4%, surpassing the 3.8% forecast and edging up from the previous 3.9%. Likewise, month-over-month inflation stood at 0.4%, outpacing the more modest 0.2% expectation, contrasting with the earlier 0.2% contraction.
While the Pound regained strength, the greenback rode its own favourable tailwinds. Federal Reserve governor Christopher Waller recently emphasized a cautious approach, suggesting that the Federal Reserve should not hastily embrace aggressive monetary easing without ensuring sustainable achievement of its 2% inflation target. This tug-of-war between strengthening currencies injected excitement into the currency pair, which had been seeking direction in recent weeks.
Technical
An ascending channel was broken down on the daily chart, but the currency pair failed to gain meaningful traction for a downside move. Instead, a consolidation range has formed between 1.2609 and 1.2805 as the market searches for its next directional move.
The 25-SMA (green line) and 50-SMA (blue line) have crossed above the 100-SMA (orange line), suggesting a bullish momentum tilt. The 50-SMA offers support close to the rectangle support and could underpin the currency pair as we advance. The 25-SMA offers resistance at 1.2696 and currently prevents the pair from retesting the rectangle resistance at 1.2805. If the 25-SMA gets cleared, a rectangle breakout could be triggered, potentially resulting in the currency pair reaching a higher resistance at 1.2849 in the upcoming sessions.
However, if the 50-SMA support at the bottom of the consolidation range fails, a breakdown could occur toward 1.2544. The Fibonacci midpoint at 1.2432 could be a potential level of interest if the breakdown occurs, while the 61.8% Fibonacci golden ratio at 1.2339 might come to light as a potential pivot point to initiate a retracement.
Summary
The GBPUSD currency pair has bounced back after a bearish session on Tuesday, riding the momentum of the hawkish inflation report. If the pair fails to clear the 25-SMA at 1.2696, the risk of a breakdown from the consolidation range remains.
Sources: Koyfin, Tradingview, Reuters
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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