Daily Price Outlook
During the European trading session, the GBP/USD currency pair failed to gain much traction and remained sluggish around the 1.2607 level. However, the possible reason for this slow movement could be the uncertainty surrounding the UK economy, as traders awaited key inflation data.
Investors were cautious, trying to gauge whether the Bank of England (BoE) might adjust its interest rate policy based on new economic signals.
On the data front, the latest UK Consumer Price Index (CPI) data for January brought some surprises. Following this data, the British Pound found some strength against major currencies.
However, the rise in inflation often leads traders to speculate that the BoE might keep interest rates higher for longer to control price increases. As a result, GBP saw some support, even though overall market conditions remained cautious.
GBP/USD Reacts to Higher-Than-Expected UK Inflation Data Amid BoE Caution
On the GBP front, the release of the United Kingdom's (UK) Consumer Price Index (CPI) data for January showed higher-than-expected inflation, which provided some support to the GBP/USD currency pair. The annual headline CPI rose by 3%, beating the 2.8% forecast and up from 2.5% in December.
The core CPI, which excludes volatile items like food, energy, alcohol, and tobacco, also showed solid growth at 3.7%, matching expectations but improving from 3.2% previously. However, on a monthly basis, inflation eased slightly by 0.1%, a slower decline than anticipated.
Despite the positive inflation data, the Bank of England (BoE) remains cautious. The services sector, a key focus for the BoE, saw inflation rise to 5% from 4.4% in December, signaling persistent price pressures. However, BoE Governor Andrew Bailey downplayed concerns, suggesting that the rise in inflation might not last.
He believes that a sluggish economy could help control inflation and reiterated that while energy prices could push inflation higher in the short term, a gradual cooling of prices is still expected.
Looking ahead, investors are keeping an eye on the upcoming UK Retail Sales data for January and the preliminary S&P Global/CIPS Purchasing Managers Index (PMI) for February, which are due on Friday.
These reports could provide fresh clues on the UK's economic health and potentially influence the direction of the GBP/USD currency pair.
GBP/USD Rises as US Dollar Weakens Ahead of Fed Minutes
On the other hand, the losses in the GBP/USD currency pair could be short-lived as the US Dollar lost traction and edged lower amid investor caution ahead of the Federal Reserve’s (Fed) meeting minutes.
Traders await clues on how long the Fed will keep interest rates steady at 4.25%-4.50%. The Fed paused its rate cuts in January after reducing rates by a total of 100 basis points in 2024, with Chair Jerome Powell emphasizing that further adjustments would depend on inflation progress and labor market conditions.
At the same time, San Francisco Fed Bank President Mary Daly supported keeping monetary policy “restrictive” until inflation continues to slow. Investors remain focused on the FOMC minutes, set to be released at 19:00 GMT, for any signs of future rate changes.
The Fed's cautious stance has kept the US Dollar under pressure, allowing the Pound to gain strength. However, any unexpected hawkish signals in the minutes could boost the US Dollar, potentially limiting GBP/USD gains.
GBP/USD – Technical Analysis
The GBP/USD pair is trading at $1.26222, dipping -0.01%, as markets remain cautious amid shifting sentiment around the U.S. dollar.
The pair is hovering just above its pivot point at $1.25906, which serves as a crucial level—holding above this keeps the short-term bullish case intact, while a break lower could shift momentum back in favor of sellers.
On the upside, immediate resistance stands at $1.26667, and a breakout above this level could push the pair toward $1.27128, with an extended move targeting $1.27569 if bullish momentum builds.
However, if the pound fails to sustain its footing, support at $1.25209 could be tested. A breach below this level would expose the next downside targets at $1.24528 and $1.23883, where buyers may look to re-enter.
From a technical perspective, the 50-EMA at $1.24963 remains below the current price, reinforcing near-term bullish sentiment.
The overall trend, however, is delicate, with traders closely watching whether the pound can hold above the pivot zone. The broader picture suggests that while buyers have an edge, a failure to clear resistance levels could invite renewed selling pressure.
For traders, a buy entry above $1.25899 appears favorable, with a take-profit target at $1.26677, while a stop loss at $1.25537 helps mitigate downside risk.
The pound’s next directional move hinges on its ability to sustain above $1.25906, as a failure to do so may trigger increased volatility.
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