GBP/USD Forecast: Inflation boost? Not so fast, sterling may suffer while BOE looks the other way

No rush – that has been the message from central banks on both sides of the Atlantic, which has been providing negative for cable. Four days before "Freedom Day," sterling has another reason to struggle as covid cases surge. 

Federal Reserve Chair Jerome Powell said the US economy is still "a ways off" to a level that warrants tapering down the bank's bond-buying scheme. Moreover, Powell insisted that rising prices are reopening-related, and thus temporary – even as he acknowledged they could persist for a few months. US consumer prices are up 5.4% YoY in June and producer prices leaped 1% last month. All these recent figures beat estimates. 

The picture is similar in the UK, albeit with more modest inflation. Consumers had to pay 2.5% more than last year for the same basket of goods in June. Prices are likely to further advance as wage growth accelerates – a whopping 7.3% yearly increase in wages in May.

Nevertheless, Bank of England Governor Andrew Bailey clarified he will not be forced to raise rates due to such transitory inflation. The takes the wind out of the sterling's sails. 

Another factor that could pound the pound comes from the rapid spread of the Delta covid variant, just as the "big bang" reopening is set to occur on July 19. The government seems keen on abandoning almost all limits, even as Brits are hesitant about maskless people in public transport.

Source: FT 

Even though a majority of the population has been vaccinated – thus providing a high degree of protection from severe illness and death – many remain vulnerable. A potential increase in hospitalizations and mortalities could cause the government to backtrack and people to limit their activity. 

Delta is also spreading in the US, and it could cause the Fed a further pause – but if the US significantly slows down, it could benefit the safe-haven dollar. 

See Delta Doom is set to storm America, the dollar could emerge as top dog

Apart from Powell's second testimony, weekly jobless claims are of interest on Thursday. However, inflation and covid remain the central themes – and they could result in a weaker pound.

GBP/USD Technical Analysis

Pound/dollar still suffers from downside momentum on the four-hour chart and continues battling with both the 50 and 100 Simple Moving Averages. All in all, the picture is mixed with a minor advantage for the bears. 

Support awaits at 1.38, which is the weekly low. It is followed by 1.3750 and then by 1.3730. 

Resistance is at 1.3865, the daily high, and then 1.3905, a stubborn cape from last week. Further above, 1.3940 and 1.40 await GBP/USD bulls.