A glance on the GBP/USD pair outlook

UK Inflation, GBP outlook

Inflation in the UK has actually increased despite ongoing efforts by the Bank of England to curb inflation, the Consumer price index reading was 10.4% in March up from 10.1% in February and from expectations of 9.9%. In comparison to the US the UK’s CPI is definitely taking more time to drop down of course due to the ongoing energy crisis, rising cost of living, oil prices stability and war implications.

Although the key term recession is always linked to the UK’s economy in recent weeks, the Final GDP QoQ increased in 2022 Q4 by 0.1% from 0.0% indicating a slight recovery. However, if inflation continues at this pace more interest rate hikes could potentially lead up to the stability of the sterling currency.

Backed-up by 11 consecutive rises of rate hikes to a 4.25% rate. And an upcoming one on the 11th of May, the GBP/USD was able to maintain key levels above the 1.20 region, which is quite astonishing in comparison to the Euro for example.

Underlying issues

The underlying issue here is that individuals in the UK are already undergoing a mortgage crisis with a recent government survey in England estimated around 4 million households will face higher monthly mortgage bills this year with almost 400 thousand facing difficulties to pay next year. Adding pressure for the Bank of England to raise more rates, leaving the cable in a weak spot.

From a dollar index perspective, as markets price in a less aggressive interest monetary policy in the US, the dollar index has been moving to the downside disregarding short-lived recovery on the back of mixed economic indicators. With perhaps a pause of rate hikes from the Federal Reserve this could lead up to the dollar back in the 90’s region.

However, the bigger picture outlines that as recession fears loom in, a safe haven recovery might be in the horizon. Any USD strength will have the power to shift the swift movement of the GBP, as recession fears remain the main key market mover, potentially triggering a safe haven demand rebound.

Moving on to facts and figures supporting the slow down of aggressive tightening is the labor market. The US ADP reported Wednesday that labor market added 145K jobs compared to 200K expected, indicating the implications of rate hikes on the labor market is starting to show gradually. The Question here is will the Fed continue moving in the same direction knowing the consequences are starting to appear on the Economy’s health or will they pull the breaks?

Technical’s

On the upside, 1.25 is a strong resistance point for the cable, if broken we can see more swift momentum to 1.26 last seen in May 2022.

On the downside, The 1.24 resistance which has now turned support may lead to further declines near the 1.2345 area. Beyond that are any break below 1.2250 may extend a serious pullback for the British sterling.