GBP/USD Slides after US Inflation Surprise & UK Wage Data
GBP/USD Analysis
The US Consumer Price Index came in hotter than expected on Tuesday, underscoring the stickiness of the past several months. Headline inflation ticked up to 3.2% y/y in February, whereas core eased only marginally to 3.8% y/y. This is another indication that the Fed's path to the 2% target will be bumpy and raises the bar for a pivot.
On the UK side, the deceleration in pay growth continued, as average weekly earnings rose by 5.6% in the November-January period. High wages complicate efforts to bring inflation down and the latest data sparked market optimism that the Bank of England could begin lowering rates sooner than later.
As a result, GBP/USD drops from last week's 2024 highs and is now exposed to the EMA200 (1.2690). Daily closes below it would halt the upside momentum and create risk for sub-1.2600 moves, although this does not look easy under current conditions.
However, the CPI report does not seem to have substantially changed market expectations for 75-100 basis points of cuts this year, starting in June. The Fed has adopted a cautious stance around removing monetary restraint and its projections suggest three cuts this year. Furthermore, in his second day of Congress testimony Chair Powell said that officials are "not far" form gaining the confidence that would allow them to cut rates, in what was interpreted as less hawkish than previous comments.
The Bank of England on the other hand, may have hinted at peak rates and weak economy strengthens the case for lowering rates, but governor Bailey had said after the last policy meeting that "we are not yet at a point" to do that [2]. It has made substantial progress on inflation, but at 4%, it is still far from target and more work is needed.
The BoE is further from the 2% target and from a pivot compared to its US counterpart, with the policy differential remaining supportive of GBP/USD. The pair defended the 38.2% Fibonacci and the upside bias is intact for now. As such, the pair retains the ability to push for new 2024 highs (1.2894), but we are cautious around further gains above 1.2996.
The trajectory of the pair will be determined by next week's policy decisions by both the Fed and the bank of England.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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