GBP/USD was hovering around 1.3390, continuing to trade within a bullish channel. As traders anticipate the upcoming Consumer Price Index (CPI) data from the United Kingdom, which is set to be released on Wednesday at 07:00 GMT, market sentiment remains cautious. The CPI is expected to continue heading in the direction of easing with a 3.5% year-over-year increase in November, compared to 3.6% in October. The upcoming data release has the potential to dramatically move the currency pair. It’s particularly relevant given the ongoing lens through which the Bank of England’s expected monetary policy actions are being scrutinised.
The GBP/USD currency pair alone accounts for nearly 12% of all foreign exchange transactions. Currently, its 14-day Relative Strength Index (RSI) is consistently remaining above the neutral midpoint of 50. This suggests a prevailing bullish sentiment. Now, analysts are sounding alarms. If CPI comes in line with expectations they think GBP/USD may struggle to make substantial advances in the days ahead.
Key Technical Levels for GBP/USD
GBP/USD is still trading in the middle of an upward-facing channel, suggesting more bullish days ahead. The next obvious resistive area for this currency pair is around the recent 1.3536 13-week peak. If GBP/USD manages to climb above this hurdle, it would likely be a sign of more bullish momentum ahead.
On the downside, strong support is found at the nine-day Exponential Moving Average (EMA) of 1.3662. If the price breaks below this level, traders will be quick to target the psychological support at 1.3300. This area is just below the 50-day EMA, which is currently at 1.3295. Holding these support levels will be important for GBP/USD in continuing to make higher lows and higher highs.
Traders are keenly looking at the technical ranges in the currency markets. They are already looking ahead to next week’s CPI data. A failure to hold above these key areas may discredit the near-term bullish thesis.
Anticipated Monetary Policy Changes
The Bank of England (BoE) is expected by all 42 economists in a Reuter’s poll to lower interest rates by 25 basis points to 3.75%. Such a decision would underscore persistent worries about inflation and growth in the UK. In general, higher interest rates lure international investors as they get more bang for their buck when investing in the country’s financial instruments. Such heightened interest can raise the demand for the Pound Sterling.
Should the CPI data indicate that inflation pressures are abating, expectations for further rate cuts from the BoE may begin to build again. Combined, this can be a big deal for the overall economy. Lower interest rates tend to make a currency less attractive to investors looking for yield. Consequently, such an increase may have a bearish effect on the GBP/USD exchange rate.
Impact of UK CPI on Market Sentiment
The anticipated decline in inflation rates may indicate that inflationary pressures are subsiding, leading to a more dovish stance from the BoE. Assuming CPI comes in as expected, GBP/USD could see some quiet trading early the next day in response.
Market participants are laser-focused right now on what this particular data point will do to expectations about where monetary policy goes in the future. A reduction of inflation can strengthen overall economic stability, and that’s great news. On the other hand, it’s a sign things are so bad that more rate cuts are needed to support growth. This macro uncertainty is making for a very cautious environment across traders.