Tuesday, July 16, 2024
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GBP/USD Forecast: Strong inflation boosts pound

by xyonent
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  • UK inflation has fallen to the Bank of England’s target of 2% for the first time in almost three years.
  • UK services price inflation rose by 5.7%, well above the expected 5.5%.
  • U.S. data released on Tuesday showed retail sales were weak in May.

GBP/USD forecasts are seeing bullish momentum building after UK data showed underlying inflation remains robust, while data from the previous session revealed a smaller than expected increase in US retail sales.

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Data on Wednesday showed that UK inflation fell to the Bank of England’s 2% target for the first time in nearly three years. But underlying price pressures remain strong, with services price inflation rising to 5.7%, above the 5.5% forecast. As a result, the Bank of England may hesitate to cut borrowing costs.

Economists expect the Bank of England to start cutting interest rates in August, but markets have lowered the likelihood of this happening to 30% from 50% before the report. At the same time, they have lowered their forecast for a rate cut this year to 44 basis points from 50. The weakening dovish outlook helped push the pound higher on Wednesday.

Meanwhile, the dollar weakened after U.S. data released on Tuesday showed weak retail sales in May. Economists had expected a stronger increase in sales that month. The weaker-than-expected reading suggests weak consumer spending and demand.

If U.S. consumers cut back on spending, the economy will weaken and inflation will fall. As a result, investors believe the Fed has more to do to reduce borrowing costs. Because of this, there is a 67% chance that the central bank will cut interest rates in September.

Major events for GBP/USD today

Investors will continue to digest the inflation data as they await the Bank of England’s policy meeting tomorrow.

GBP/USD Technical Forecast: Rebound Encounters Strong SMA and Fibonacci Resistance

GBP/USD 4-hour chart

On the technical front, the GBP/USD price has risen sharply from the key level at 1.2700 to the 30-SMA resistance. However, the bias has not yet shifted from bearish to bullish as the price is still testing the SMA resistance and the 0.382 Fibonacci level. Nevertheless, the bulls are gaining momentum as evidenced by the RSI crossing above 50.

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Hence, it might break above the SMA and retest the resistance level at 1.2850, however, if the SMA and Fibonacci levels hold firm, the bears may return and target the 1.2600 levels.

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