GBP to USD Forecast And the CPI Effect: British Pound Braces for Volatility

Highlights

• UK CPI Report for July holds the potential to swing the Pound as BoE hawkish bets rise.
• Sticky inflation and surging wages pose challenges to Bank of England policy.
• FOMC minutes to reveal stance as recent indicators signal a hot US economy.

On Tuesday, the GBP to USD gained 0.16% to wrap up the day at $1.27001. A mixed start to the day saw the GBP/USD fall to a low of $1.26726 before rising to an afternoon high of $1.27522. However, US retail sales figures sent the GBP/USD south late in the session.

It is a busy Wednesday for the GBP to USD. This morning, the UK CPI Report for July will move the dial. After the hotter-than-expected wage growth figures, sticky inflation would fuel bets on a more hawkish BoE monetary policy outlook.

Economists forecast the annual inflation rate to soften from 7.9% to 6.8% and the core inflation rate to weaken from 6.9% to 6.8%. Softer-than-expected headline inflation would ease pressure on the BoE and deliver a GBP/USD pullback. However, sticky core inflation would deliver policy uncertainty.

UK inflation and wage growth remain bugbears for the Bank of England. Sticky inflation and upward trends in wage growth would force the BoE to ignore the macroeconomic environment and aggressively push interest rates higher. Until now, the UK economy has proven resilient, with the latest UK GDP numbers enabling the BoE to take more aggressive policy maneuvers.

While the UK economic calendar is busy, no Bank of England Monetary Policy Committee Members are on the calendar to speak today, leaving chatter with the media to influence.

The US Session

Housing sector data and industrial production figures for July will be in focus. While the housing sector is a litmus test for the US economy, industrial production numbers will garner interest.

Investors are looking for signs of a deviation from the soft-landing theory.

However, it is worth noting that the industrial production numbers are unlikely to influence the Fed. The manufacturing sector accounts for less than 30% of the US economy and is unlikely to dictate sentiment toward Fed monetary policy. In contrast, a marked deterioration in US housing sector conditions would raise eyebrows.

Later in the session, the FOMC meeting minutes will impact the GBP/USD. While the Fed raised rates by 25 basis points in July, Fed Chair Powell left the door ajar to further rate hikes. With recent economic indicators supporting further tightening, the minutes will reveal whether the Hawks or the Doves are in the driving seat.

Hawkish minutes will retest buyer appetite for the GBP/USD as economic indicators signal a hotter US economy.

GBP to USD Price Action

Daily Chart

The Daily Chart showed the GBP to USD sat below the $1.2785 – $1.2862 resistance band. Looking at the EMAs, the GBP to USD sat below the 50-day EMA while holding above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

Looking at the 14-Daily RSI, 43.64 reflects bearish sentiment. The RSI signals a fall to sub-$1.2650 to bring the $1.2520 – $1.2440 support band into view. However, a GBP to USD move through the 50-day EMA would give the bulls a run at the $1.2785 – $1.2862 resistance band.

4-Hourly Chart

Looking at the 4-Hourly Chart, the GBP to USD hovers below the $1.2785 – $1.2862 resistance band. The GBP to USD also sits below the 50-day and 200-day EMAs, sending bearish near and longer-term price signals.

The 14-4H RSI reading of 49.03 reflects bearish sentiment, with selling pressure outweighing buying pressure. Significantly, the RSI signals a fall to sub-$1.2650 to bring the $1.2520 – $1.2440 support band into play. However, a move through the 50-day EMA would give the bulls a run at the $1.2785 – $1.2862 resistance band.

Today’s price action hinges on the UK CPI Report and the FOMC meeting minutes.