GBP/USD Limits Further US-CPI Inspired Losses And Retakes 1.26000's As Focus Shifts Toward UK CPI Data And Bailey's Speech
Key Takeaways:
- GBP/USD pares US-CPI inspired losses and moves back above the 1.26000 mark
- Rebounding U.S. Treasury bond yields and strong U.K. wage growth figures extend support to the cable and help limit further losses around the GBP/USD pair
- The market's focus shifts toward the release of key U.K. inflation data reports and the BoE's Governor Andrew Bailey's speech
GBP/USD cross-extends the overnight bounce from the vicinity of the 1.25729 level or one-week low and retakes the 1.26000 level during the mid-Asian session on Wednesday. The shared currency looks set to maintain its offered tone heading into the European session.
A combination of factors assisted the cable recovery from a one-week low following a heavy sell-off on Tuesday orchestrated by a hotter-than-expected U.S. inflation data report that saw the Great British Pound (GBP) weaken significantly against the buck to close with heavy losses on Tuesday.
A fresh leg down in U.S. Treasury bond yields helped revive the U.S. dollar supply and became a key factor in capturing the downside for the GBP/USD pair. Apart from this, a positive round of U.K. data further supports the major and is another factor in limiting further losses around the shared currency.
A UK Office for National Statistics (ONS) report released on Tuesday showed Regular pay which excludes bonus payment in the U.K., went up 6.2% year-on-year to GBP 626/week in the three months to December of 2023, the lowest growth in fourteen months, compared to a 6.7% rise in the previous period but above expectations of 6%.
Additionally, The United Kingdom's unemployment rate declined to 3.8% in the fourth quarter of 2023, down from 4.0% in the three months leading up to September and slightly below the market consensus of 4.0%.
That said, markets feel the strong U.K. wage growth figures plus the incoming U.K. inflation reports, which are expected to show inflation continues to remain a menace in the U.K., could urge the Bank of England (BoE) to keep its monetary policy at a restrictive level for a much more extended period to rein in core inflation in the U.K.
Shifting to the U.S. docket, a hotter-than-expected U.S. inflation report released on Wednesday fully cements market expectations that the Fed will leave rates unchanged during the March meeting and start cutting rates during the third quarter of 2024. A U.S. Bureau of Labor Statistics report showed consumer prices rose to 0.3% in January, up from 0.2% in December, and came above market consensus of 0.2% increase. Every year, consumer prices declined to 3.1% in January from 3.4% in December, exceeding market expectations of a 2.9% decrease. Excluding food and energy, the so-called core inflation rose to 0.4% in January, up from 0.3% in December and beating market forecasts of a 0.3% increase. On a year-to-year basis, core inflation was unchanged at 3.9% but came above the market consensus of a 3.7% decline.
That said, the hot inflation report, along with last week's robust U.S. job data and recent hawkish Fed comments, thoroughly debunks the idea of early aggressive rate cuts and supports the view that rates will likely stay higher for longer.
The immediate market implications of the hotter-than-expected inflation figures saw U.S. Treasury bond yields rise significantly, underpinning the U.S. dollar index, which rose by 0.72% against the Great British Pound (GBP). This helped reverse the substantial U.K. wage growth gains. Additionally, the U.S. equity markets dipped significantly following the report to register one of their worst days in over a month.
However, the current price action shows investors need to pay attention to the hot U.S. CPI data report in favor of the incoming U.K. inflation data and the BoE's Governor Andrew Bailey's speech. If the incoming data becomes stronger than market consensus and the governor's speech becomes more hawkish, it will further help the GBP/USD cross recover.
As we advance, investors look forward to the U.K. docket featuring the release of the key inflation data report, which will offer further clues on the Bank of England's
future policy decisions. Traders will further look for cues from the BoE's Governor Andrew Bailey's speech, which will offer further clues on the Bank of England's future policy decisions.
Technical Outlook: Four-Hour GBP/USD Price Chart
From a technical perspective, using a four-hour price chart, GBP/USD is trading with modest gains above the 1.26000 mark and slightly above the 1.25985 pivot level (P) following an extension of the modest bounce from the lower limit of the bearish flag pattern extending from the early-February 2024 swing lower-lows. Some follow-through buying would uplift spot prices toward the technically strong 200 Exponential Moving Average (EMA) at the 1.26529 level. Acceptance above this level, followed by an RSI (14) technical oscillator move above the signal line in the coming sessions, would act as a fresh trigger for new buyers to jump in, paving the way for a rally toward the 1.26781 level (R1) en route to the 1.27224 level (R2). In highly bullish cases, the GBP/USD cross could extend a leg up to retest the key resistance level plotted by an ascending trendline extending from the early February 2024 swing to higher highs (upper limit of the bearish flag pattern).
On the flip side, any meaningful pullback now finds support at the 1.25985 level. A convincing move below this level will pave the way for a drop toward the lower limit of the bearish flag pattern. A clean break below this level would reaffirm the bearish thesis and pave the way for an accelerated decline toward the 1.25518 support level (S1). On further weakness, the focus shifts lower to the 1.25000 round mark, followed by the 1.24730 level.
