GBP to USD Forecasts: $1.29 in the Hands of UK Inflation and Powell

It is a busy Wednesday session for the GBP to USD. The May UK consumer price inflation report will be in the spotlight today.

With the Bank of England set to deliver its June interest rate decision on Thursday, today’s inflation numbers will materially influence the Bank’s outlook on inflation, the UK economy, and monetary policy.

To date, inflation has remained sticky. With a more resilient-than-expected UK economy, the markets expect a hawkish 25 basis-point interest rate hike. An annual inflation rate below 8% could support a BoE pause after the summer.

Economists forecast the UK annual inflation rate to soften from 8.7% to 8.4% in May. Investors will need to look beyond the headline figure, with food price inflation and core inflation needing consideration.

However, wage growth remains a bugbear that would also need to slow to give the doves more voice.

With inflation in the spotlight, investors should track Bank of England commentary for clues on monetary policy and the economic outlook. However, no Monetary Policy Committee members on the calendar to speak, leaving chatter with the media to move the dial.

GBP to USD Price Action

This morning, the GBP/USD was down 0.04% to $1.27592. A mixed start to the day saw the GBP to USD fall to an early low of $1.27494 before rising to a high of $1.27674.

Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The GBP/USD sat above the 50-day EMA, currently at $1.26889. The 50-day EMA pulled further away from the 200-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the S1 ($1.2716) and the 50-day EMA ($1.26899) would support a breakout from R1 ($1.2810) to target R2 ($1.2855). However, a fall through S1 ($1.2716) and the 50-day EMA ($1.26889) would bring S2 ($1.2668) into view. A fall through the 50-day EMA would send a bearish signal.

Resistance & Support Levels

The Pound has to move through the $1.2761 pivot to target the First Major Resistance Level (R1) at $1.2810. A breakout from the Tuesday high of $1.28067 would signal an extended breakout session. However, the Pound would need the UK inflation numbers and Fed Chair Powell to support a bullish session.

In the event of an extended rally, the GBP/USD would likely test the Second Major Resistance Level (R2) at $1.2855 and resistance at $1.29. The Third Major Resistance Level sits at $1.2948.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.2716 in play. However, barring a UK inflation-fueled sell-off, the GBP/USD should avoid sub-$1.2650. The Second Major Support Level (S2) at $1.2668 should limit the downside. The Third Major Support Level (S3) sits at $1.2575.

The US Session

Looking ahead to the US session, it is another quiet day on the US economic calendar. There are no US economic indicators to influence. The lack of economic indicators will leave Fed Chair Powell and FOMC member commentary to move the dial.

Fed Chair Powell will give the first day of testimony. While the FOMC press conference was only last week, investors should look for any deviation from the FOMC press conference script.

The anticipation of Fed Chair Powell’s testimony on interest rate expectations was telling. According to the CME FedWatch Tool, the probability of a 25-basis point July rate hike stood at 76.9% on Tuesday versus 74.4% on Friday. The chances of the Fed lifting the Fed Funds Rate to 5.75% in September increased from 8.9% to 11.5%.