Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2895.
- Add a stop-loss at 1.2785.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.2815 and a take-profit at 1.2750.
- Add a stop-loss at 1.2895.
GBP/USD exchange rate rose after the US published highly encouraging inflation numbers and after the Federal Reserve left interest rates unchanged as was widely expected. It rose to a high of 1.2860, its highest swing since March 8th of this year.
US inflation data and Fed decision
The US published a highly-welcome inflation report on Wednesday. According to the country’s statistics agency, the headline Consumer Price Index (CPI) softened from 0.3% in April to 0.0% in April, missing the expected 0.1%. The inflation slowed to 3.3% on a year-on-year basis.
The closely-watched core inflation also softened during the month. It slowed to 0.2% MoM and 3.4% YoY in May, missing the estimated 0.3% and 3.5%. It was the second straight month that inflation softened in the US.
The GBP/USD also reacted to the Federal Reserve interest rate decision. As was widely expected, the Fed decided to leave interest rates unchanged between 5.25% and 5.50% and mentioned that inflation was still above its comfortable level of 2.0%.
The Fed’s dot plot pointed to one interest rate hike this year, down from three in the last meetings. Nonetheless, the statement noted that the bank had observed some modest progress on inflation in the past two months.
Looking ahead, the next important data to watch will come out from the US, which will publish the latest initial and jobless claims numbers and the Producer Price Index (PPI) report. Economists expect the data to reveal that the headline and core PPI numbers rose to 2.5% and 2.4% in June.
Focus also shifts to the Bank of England, which will meet next week. Like the Fed, the bank is expected to leave interest rates unchanged and point to one or two cuts this year. The bank will have to contend with next month’s election in the UK.
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GBP/USD Technical Analysis
The GBP/USD made a strong bullish breakout after the modest improvement in US inflation data. It jumped to the support of 1.2860, a few pips below the second resistance of the Woodie pivot point.
The pair has moved slightly below the upper side of the orange ascending channel. Also, it has moved above the Ichimoku cloud indicator and the 50-period moving average.
Most importantly, the GBP/USD exchange rate has been forming an inverse head and shoulders pattern, a popular bullish sign.
Therefore, the pair will likely have a bullish breakout with the next reference level to watch being at 1.2895, its highest level on March 4th. The alternative scenario is where it drops and retests the first resistance at 1.2780.
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