The British Pound (GBP) is finding some support against the US Dollar (USD) ahead of key US inflation data due this week. Firstly, weaker-than-expected wage growth data in the UK has tempered expectations of aggressive interest rate hikes from the Bank of England (BoE). This dovish shift contrasts with the US Federal Reserve’s (Fed) hawkish stance, potentially narrowing the interest rate differential between the two economies and supporting GBP.
Secondly, market expectations for US rate cuts have increased. A potential undershoot in this week’s US Consumer Price Index (CPI) data could further weaken the USD. Strategists at Morgan Stanley anticipate a softer-than-expected CPI print, potentially leading to a decline in the USD and lifting GBPUSD towards 1.27, assuming low market volatility.
However, this bullish sentiment for GBP is countered by concerns about the UK’s underlying economic health. Slowing wage growth and a weakening job market raise questions about the sustainability of the UK’s recovery. Additionally, even a dovish BoE might be forced to act if inflation remains stubbornly high.
Technical Analysis
The GBPUSD price action currently sits at 1.26541, displaying a bullish breakout. The pair has decisively climbed above the 20-SMA (green line), 50-SMA (blue line), and, crucially, the 100-SMA (orange line), indicating a potential shift in momentum. The Relative Strength Index (RSI) at 57.05 sits comfortably above 50, further supporting the bullish bias.
A sustained push above the current level could present short-term trading opportunities towards the 38.20% Fibonacci retracement level (1.26747). A confirmed breakout above this resistance could open the doors for a test of the 50.00% Fibonacci retracement level (1.27165) and, ultimately, the 61.80% Fibonacci retracement level (1.27583).
Conversely, a decline below the short-term SMAs could offer counter-trend trading opportunities towards the 23.60% Fibonacci retracement level (1.26230). A clear break below this initial support could bring the 1.25857 level and the major support zone at 1.25395 into play.
Summary
The GBPUSD is experiencing a bullish surge, driven by dovish expectations from the BoE and the potential for a weaker USD on the back of US CPI data. The technical indicators on the 4-hour chart paint a bullish picture, with a potential test of the 50.00% Fibonacci retracement level on the cards. However, underlying concerns about the UK economy and the possibility of a hawkish BoE if inflation persists introduce elements of caution.
Sources: TradingView, Trading Economics, Dow Jones Newswire.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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