GBP/USD analysis: Cable rebounds after US CPI-related drop

• GBP/USD analysis: US dollar fails to find too much love from hot CPI
• UK economy rebounds, US Retail Sales, PPI and UoM surveys still to come
• GBP/USD technical analysis point higher

Video: GBP/USD analysis and insights into FX majors, precious metals and indices

The GBP/USD was looking to recover following its US CPI-related drop on Tuesday, in a relatively quieter day for US data and with the Fed in the blackout period ahead of next week’s FOMC meeting. In the UK, GDP data showed that the UK economy grew in January, raising hopes that the recession was short-lived. The GBP/USD will be among the busier of currency pairs in a central bank bonanza next week. But we still have a few more important macro releases from the US to come this week and so I wouldn’t rule out the prospects of a recovery back towards 1.2900, where the cable almost reached on Friday before dropping.

GBP/USD analysis: US dollar fails to find too much love from hot CPI

Part of the reason the GBP/USD has rebounded is to do with the US dollar. Federal Reserve Chair Jerome Powell's sunny take on inflation is still music to traders' ears, even though the core CPI nudged up by 0.4% in February, a smidge higher than expected. But the market's reaction? Not quite as wild as before when faced with similar surprises in inflation. It looks like traders are still hanging onto Powell's less than hawkish vibe, which has everyone thinking about potential rate cuts in June and keeping the market response in check.

In the rates futures market, there has only been a slight adjustment downwards since the week began, suggesting expectation of easing haven’t changed much despite the stronger inflation data. Right now, traders are pencilling in 19 basis points for the June rate decision and 85 basis points by December. Even though payrolls and inflation were a bit perkier than forecast, the market didn't bat an eyelid much. It seems like the market's feeling pretty steady, all thanks to Powell's laid-back stance.

Unless there's a big shake-up in risk-taking by the end of the week, the GBP/USD could make back some or all of its lost ground as we head towards the end of the week.

In case you missed it on Tuesday, at 3.2%, headline CPI accelerated against expectations from 3.1% recorded in the month before. Core CPI was expected to ease to 3.7%, but it came in at 3.8%, albeit a touch lower from the previous print of 3.9%. Still, this was the third month of above-forecast inflation with prices of basic necessities like car insurance, transportation and hospital services all rising noticeably.

US Retail Sales, PPI and UoM surveys still to come

Looking ahead, we have more inflation data coming up later in the week with PPI on Thursday and UoM Inflation Expectations survey on Friday. We also have retail sales coming up on Thursday, with headline sale seen rising 0.8% and core sales 0.5% month-over-month. Last month, both headline and core retail sales data disappointed expectations, and this contributed to the weakness we have seen in the dollar of late, with a few other macro pointers also pointing to a slowdown in economic activity. If further evidence emerges of a struggling consumer, then we could see the dollar weaken. A very strong report is what the dollar bulls will be eying.

But CPI was the main data highlight this week and it didn’t disappoint those who were calling for a stronger print. However, the reaction was less than what the dollar bulls would have liked to see.

GBP/USD analysis: UK economy grew 0.2% in January

The pound was gradually climbing back, buoyed by slightly positive news from the UK, where the economy grew in January, sparking optimism that the recession was brief.

In January, the UK's GDP increased by 0.2%, meeting expectations and bouncing back from the previous month's +0.1% decline. Delving into the details, the construction (+1.1%) sector saw the biggest improvement, counterbalancing a decrease in industrial production (-0.2%). These figures indicate that the UK is poised for growth in the first quarter of 2024, marking the end of last year's economic downturn.

The GBP/USD, which had almost reached 1.29 handle on Friday’s session before being hit by stronger US data, managed to bounce back following today’s stronger UK GDP data. Recent comments from various officials from the Bank of England suggest a cautious approach to adjusting monetary policy is warranted.

The GDP data follows Tuesday’s report indicating a softening in the UK labour market, with wage growth hitting a two-year low, job vacancies declining for the 20th consecutive month, and unemployment rising to 3.9%.

GBP/USD technical analysis

Source:TradingView.com

With the GBP/USD making higher highs and higher lows of late, the path of least resistance is clearly to the upside, despite the weakness observed this week. In this regard, the 1.2750/60 area is very important given that this was the last resistance area before rates broke out last week.

If this 1.2750/60 support levels fails, then 1.2700 could be the next downside target for the bears. However, the bulls will be looking to defend 1.2750/60 area and eye a daily close above 1.2800.

Should the GBP/USD break through 1.2800, the levels to watch on the upside include 1.2828, the December high, followed by 1.2900 and 1.3000 round handles, and finally the July high of 1.3140.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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