GBP/USD Weekly Forecast: Door open for a test of 1.2900, UK inflation data next in focus

• GBP/USD saw dip-buying trades as softer US CPI revived Federal Reserve doves.
• Focus shifts to United Kingdom top-tier data for extension of the GBP/USD rally.
• GBP/USD confirmed a bull flag, opening the door for a test of 1.2900 and beyond.

Buying interest around GBP/USD remained unabated as the Pound Sterling booked its fifth weekly gain against the beleaguered United States Dollar (USD). US Federal Reserve (Fed) doves are back in town after softer US Consumer Price Index (CPI) data. Will Bank of England (BoE) doves snatch the spot on the UK inflation data?

GBP/USD: What happened last week?

After opening the week on a negative note, the tide turned in favor of Pound Sterling bulls, as the narrative that cooling United States inflation data could prompt the Federal Reserve to end its tightening cycle and cut rates by the end of this year, exacerbating the pain in the US Dollar.

Starting out the week, the US Dollar stood tall, as Good Friday’s strong US labor market report provided the much-needed zest to the ongoing recovery momentum. The United States economy added 236,000 jobs in March, almost in line with the 240K figure expected. The Unemployment Rate fell to 3.5% last month, from 3.6% in February, even as the labor force grew by about half a million people and the participation rate rose slightly. Average hourly wages rose 0.3%, slightly faster than the month before. Solid US jobs data ramped hawkish Fed rate hike bets, with markets pricing about a 66% probability of a 25 bps rate hike next month vs. a 52% chance seen ahead of the data release.

However, heading into the weekly closing, markets began to price in rate cuts by the Federal Reserve as early September after delivering a 25 bps rate in May and pausing in June. The revival of the dovish Federal Reserve interest rates outlook smashed the US Dollar to a one-year low against a basket of currencies, with the US Dollar Index staying vulnerable on the 100.00 level. In response, the GBP/USD pair extended its winning momentum beyond 1.2525, refreshing ten-month highs.

What led to the massive U-turn in the market’s expectations of the Federal Reserve rates outlook? It definitely had to be the most important event risk of the week – the US Consumer Price Index data. Following the recent series of discouraging US activity numbers, the United States Bureau of Labor Statistics (BLS) released the Consumer Price Index data for March on Wednesday, showing an annual inflation rate of 5.0%, while the month-on-month CPI rise was 0.1% in March. The all-items index increased 5.0% for the 12 months ending March, registering the smallest 12-month increase since the period ending May 2021. The housing component came in at 0.6% vs 0.8% last month. Shelter accounts for 34.7% of CPI inflation. 

Meanwhile, on Thursday, US Producer Price Index (PPI) continued its downward slide in March, with annualized price variation sinking dramatically by 2.7% from an upwardly revised 4.9%. It was the lowest annual level for the key inflation gauge since January 2021. Signs of softening price pressures broadly continued to accentuate the downside in the US Dollar.

On the UK side of the story, Pound Sterling buyers largely ignored the top-tier statistics, which showed that the UK economy unexpectedly stalled in February, with the country facing more strikes as a cost-of-living crisis erodes the value of wages, the official data showed Thursday. The zero-growth performance followed a 0.4% expansion in January. The UK Treasury and the Bank of England said they expect the country to dodge a recession this year even as UK inflation remains above 10.0%, lending some support to the British Pound.

The data from the US revealed on Friday that Retail Sales contracted by 1% on a monthly basis in March, compared to the market expectation for a decrease of 0.4%. The Fed reported a 0.4% growth in Industrial Production in March. In the meantime, Federal Reserve Governor Christopher Waller said that the monetary policy will need to remain tight for a substantial period and “longer than markets anticipate.” The comments helped the USD erase some of its weekly losses and caused GBP/USD to decline below 1.2500. Ahead of the weekend, the University of Michigan said that the Consumer Confidence Index improved slightly to 63.5 in early April from 62 in March. More importantly, the year-ahead inflation expectation component of the survey rose to 4.6% from 3.6%.

United Kingdom Consumer Price Index next on tap

After a critical week for the United States calendar, it’s the turn on the other side of the Atlantic, keeping GBP/USD traders on their toes. Monday seems to be fairly quiet in absence of any top-tier US and UK  economic data releases.

The United Kingdom labor market report will stand out on Tuesday, following the publication of China’s Gross Domestic Product (GDP) and activity numbers. Chinese data tends to have a significant impact on risk sentiment, in turn affecting the high-beta Pound Sterling. From the US docket, traders will see the mid-tier Housing Starts and Building Permits data on Tuesday.

The UK Consumer Price Index (CPI) data will hold the key on Wednesday amidst the release of the Bank of England’s (BoE) Quarterly Bulletin. Meanwhile, traders will await the Beige Book in American trading.

Thursday is devoid of any data release from the UK, and therefore, the focus will be on the United States weekly Jobless Claims, Philly Fed Manufacturing gauge and the Existing Home Sales data.

GBP/USD will brace for an action-packed Friday, with the S&P Global Preliminary PMIs due from both sides of the Atlantic. The Retail Sales from the United Kingdom will also be closely eyed.

As the Federal Reserve and Bank of England remain data-dependent, speeches from the respective central banks’ policymakers will be closely scrutinized for future policy paths.

GBP/USD: Technical outlook

The previous week’s correction from ten-month highs of 1.2525 extended on Monday, as the GBP/USD pair tumbled to test immediate support, then at the 1.2350 psychological level.

The bearish crossover, represented by the bullish 100-Daily Moving Average (DMA) piercing through the flattish 50 DMA from below, did come into play and weighed on the GBP/USD pair in the early part of the last week.

Pound Sterling bulls, however, managed to defend the latter, which helped stage a solid comeback in GBP/USD back to the 1.2500 barrier. It was the bull flag breakout confirmed on Tuesday that shifted the course back in favor of GBP/USD buyers.

In the week ahead, GBP/USD buyers need to find acceptance above the 1.2600 level to resume the upward momentum toward the May 27 2022 high of 1.2669. Next on bulls’ radars is the static resistance at 1.2700, above which a fresh uptrend toward the bull flag measured target at 1.2934 could be in the offing.

So long as the 14-day Relative Strength Index (RSI) holds comfortably above the midline, the bullish potential is likely to remain intact.

On the flip side, the weekly low and the critical support near 1.2350 need to give way for GBP/USD sellers to regain control. At that level, the upward-pointing 21 DMA continues to hang around.

The next relevant downside target is seen at the 1.2300 round figure, below which a fresh downswing toward 1.2175 cannot be ruled out. The 100 and 50 DMAs coincide in that demand area. 

GBP/USD daily chart

GBP/USD: Forecast poll

A majority of experts polled by FXStreet expect GBP/USD to remain bullish in the near term. The one-week average target is located at 1.2500. There is a bearish tilt over the one-month view, and the one-quarter view paints a mixed picture.