The US dollar finds itself trying in mid-week trading amid a broader bearish shift in global stock markets, highlighting the currency's appeal as a safe haven. This source of support keeps a lid on the GBP/USD exchange rate which is likely to be higher in the wake of UK inflation figures. It proved to be stronger than economists had expected. For three consecutive trading sessions, the GBP/USD pair has been trying to rebound to the upside, and those attempts were halted by testing the resistance level 1.2475, and settling around 1.2430 at the time of writing.
According to official figures, the headline inflation rate in the United Kingdom reached 10.1%, defying expectations for a decline to 9.8% and casting doubt on the Bank of England's expectations of a rapid decline in inflation to 3.0% by the first quarter of 2023. Even if the pound sterling pair against the US Dollar (GBP/USD) is struggling to the upside, the British Pound is actually the best performing major currency today as investors bet on a rate hike from the Bank of England.
Commenting on the performance of the currency pair. “GBP/USD remained above 1.24, supported by still-high UK CPI data for March, with US dollar dynamics across the board also playing a major role in Pay sterling at the moment.”
Britain's core inflation rate rose 6.2% year-on-year in March, unchanged in February, which was stronger than the 6.0% the market was looking for. The month-over-month change in the core held steady at 0.9%, beating estimates of 0.6%. A note from the experts at TD Securities says: "Headline inflation comes in 0.9 pips above BoE's latest forecast and with strong fundamental momentum, makes for a further 25 basis point hike from the Monetary Policy Committee at its meeting in May."
In fact, the Bank of England's preferred measure of domestically generated inflation, the consumer price index for essential services excluding airline tickets, group holidays and education, was unchanged at 6.4% y/y. For his part, Han Joo Ho, an economist at Lloyds Bank, said: “The stronger-than-expected British inflation figures provided some support for the pound.”
- GBP/USD is struggling to hold 1.25.
- Recent forex market dynamics suggest that rallies in GBP/USD above 1.25 may remain difficult to sustain in the near term, unless we see another capitulation in the dollar complex.
- We are reminded that the pound's recent performance has been more mixed after a positive first quarter.
- The outlook could be more challenging as markets priced in a BoE hike of 25bp in May with levels of conviction rising after the latest data.
Derek Halpenny, who heads forex research at MUFG Bank, agrees; “The market is fully priced in for this now and with the Fed expected to hike in May and the European Central Bank to hike even more over the coming months, the positive momentum from this data is likely to be contained for the pound.”
This may suggest that GBP/USD could struggle to make any incursions above 1.25 in the near term, even if the technical signals remain broadly supportive. Overall, GBP/USD is trading above all of its major daily moving averages and is supported by an upward sloping trend line developed since early March. GBP/USD is up almost 3% YTD and nearly 4% above the first level. and the average price of the year. The big question is whether the $1.30 resistance level is trading this year or if $1.25 is the new ceiling?
For much of 2022, the British pound showed little appetite for a rally in the wake of hotter-than-expected inflation data given its negative repercussions on the economy. This was also a time of political uncertainty as prime ministers changed hands and the market backed away from newcomer Liz Truss' big tax-cut spending plans. Improving confidence in the British leadership has helped stabilize investor sentiment and allowed the traditional “higher inflation + interest rates = stronger exchange rate” relationship to establish itself again. But there is still a risk of a return in 2022 if inflation remains stubbornly high.
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