Home ForexForecasts GBP/USD: Inflation report could cause sharp move: key levels to watch

GBP/USD: Inflation report could cause sharp move: key levels to watch

by SuperiorInvest

The index rose in reaction to the UK's firmer rise earlier this morning, ahead of the release of even more top-line data from both sides of the pond.

It is the inflation figures from both the UK and, first, the US, that are likely to set the tone for both currencies.

Ahead of the long-awaited US release later today, GBP/USD was a bit firmer, maintaining a slight gain for the week around 1.2650.

All in all, consolidation was the name of the game for this pair as traders awaited the direction of inflation data. But the cable could start trending once this week's inflation numbers are out of the way.

All eyes on US CPI

At the beginning of this week and much of last week, currency markets predominantly favored the dollar, with the dollar maintaining its support despite the absence of any major developments.

The previous week saw a strong U.S. jobs report and several other data indicators that beat expectations, along with indications from Fed Chair Powell and the FOMC that signaled against an early rate cut. .

Nevertheless, the dynamism of the technology sector persisted on Wall Street, culminating with the historic 5,000 kilometer milestone, driven largely by solid earnings reports from companies.

The good performance of the stock market weighed on the dollar against some risk-sensitive currencies, such as the , the , and the , as well as the pound sterling.

However, losses from economies with negative yields and , where interest rates are among the lowest among developed economies, helped provide some support to the .

As a result, the dollar index posted another weekly gain, albeit a small one. The DXY closed higher in January, ending a streak of two consecutive monthly losses.

So, on the one hand, strong data is helping to support the dollar, while the current stock market rally is encouraging some investors to turn to more risk-sensitive currencies.

Therefore, a potentially stronger inflation report today could further bolster the dollar's strength against lower-yielding currencies, while a softer reading would be welcomed by GBP/USD and all traders who prefer foreign currencies. to the USD.

The key data on today's US economic calendar is the Consumer Price Index, which is expected to fall at an annual rate of 2.9% in January from 3.4% in December, with a figure of +0.2% compared to +0.3% the previous month.

It is expected to register +3.7% year-on-year, down from +3.9% or +0.3%.

The resilience of the American consumer has been underscored by recent numbers that beat forecasts for six consecutive months.

December saw a 0.6% increase in retail sales, accompanied by a 0.4% increase in sales.

These encouraging retail figures have coincided with an increase in consumer confidence in recent months.

Consequently, wages remain low, wages continue to grow, and inflation is gradually moderating.

With these factors in play, the Federal Reserve has found no compelling reason to accelerate its policy easing.

If this week's data release, particularly on retail sales, indicates greater economic resilience in the US, further gains can be anticipated for the US dollar.

However, retail sales this time are expected to decline by 0.2% month-on-month, although core sales are forecast to increase by 0.1%. Let's see if we get another surprise impression.

Here's a list of key data to watch this week in the US:

Busy week for pound traders

GBP/USD will be influenced by the US data release, along with all other major pairs. But sterling faces additional volatility due to a busy week of data here in the UK too.

Highlights from the UK include , with all figures due to be released from Wednesday.

Today we had stronger data from the UK, as wages improved and the unemployment rate fell more than expected.

The average earnings rate, which included bonuses, reached 5.8% in the three months to December, compared with the same period a year earlier.

This was stronger than the 5.6% expected and the previous month's data was revised upwards to 6.7% from 6.5%, suggesting wage inflation is still on an upward trend.

On top of this, the annual rate fell more than expected to just 3.8% in the three months to December, down from 4.2% in November.

The employment sector remained quite strong at the beginning of the year, as it increased less than expected to 14.1 thousand in January.

Here's a list of key data to keep an eye on for the rest of this week in the UK:

UK economic calendar

The pound, stronger today, could come under pressure if UK inflation turns out to be surprisingly weak, although economists believe prices have risen further to 4.1% year-on-year in January from 4.0% in December .

That said, GBP/USD price action will also depend on US data.

Therefore, if you want to isolate the pound's reaction to the upcoming UK data, then it is better to focus on a pound cross, such as the or , rather than GBP/USD itself, which will be influenced by the upcoming CPI. US data later.

But if you have some patience, GBP/USD could see a potentially sharp move once inflation figures are released, which could give you good trading opportunities.

GBP/USD Technical Analysis and Trading Ideas

The key short-term resistance level to watch for GBP/USD is around 1.2650, which was being tested at the time of writing.

GBP/USD-Daily Chart

GBP/USD-Daily Chart

Source: TradingView.com

This level was previously supported and the 21-day exponential moving average comes into play here.

Above this level, between 1.2730 and 1.2770 is an area of ​​additional resistance, where previous recovery attempts have failed in recent weeks, including last week.

Therefore, if we break through last week's high of 1.2772 and hold there, then this will be a key bullish reversal signal.

On the downside, tentative support is seen around the 200-day average around the 1.2650 area.

Below this, the area between the psychologically important 1.2500 level and the long-term 38.2% Fibonacci level at 1.2525 is key. A possible daily closing hit at 1.25 would be a key bearish reversal signal.

Therefore, as things stand, GBP/USD is within a trading range with a modest bullish bias, but without a clear long-term directional bias.

This week's upcoming inflation data could change that and set the tone for the weeks ahead.

Therefore, GBP/USD should be on your watch list of markets to trade, especially if we see surprisingly weak inflation in the United States.

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