- The exchange rate of the pound sterling currency pair against the US dollar, GBP/USD, rose to the highest level in two months above the 1.24 resistance, with gains that extended towards the 1.2505 level and stabilized around the 1.2480 level at the time of writing the analysis.
- Meanwhile, the rebound gains increased after the release of US inflation data for the month of October, which showed that inflation is at the largest level.
- Currently, the world's economy has declined more than the market expected.
- Accordingly, the dollar was sold after official figures showed that US inflation in the consumer price index rose by 3.2% during the year until October, which is less than the 3.3% that the market expected and represents a sharp slowdown from the September reading of 3.7%.
US Dollar Down on Weak Data
CPI inflation was flat month-on-month, down from September's advance of 0.4% and below expectations of 0.1%. Thus, the result reinforces the market narrative that the US Federal Reserve has done enough to bring inflation back to its 2.0% target. Also, the all-important core CPI inflation figure was 4.0% year-on-year in October, below expectations for an unchanged reading of 4.1% from September. Moreover, the monthly core reading was 0.2%, down from 0.3% in September, which is also what the market was looking for. Overall, money market pricing reveals that investors are now assigning less than a 10% chance that the Fed will raise US interest rates beyond the current range of 5.25% to 5.50%. furthermore, the odds of another rate hike by January were as high as 28% before the inflation report, and financial markets are now fully pricing in the Fed's first cut at its June 24 meeting. Sympathetically, US bond yields fell by boosting demand for stocks and reducing demand for the dollar.
In general, inflation numbers for October reflected the decline in global oil prices, as the energy component fell by 4.5% on an annual basis in October and fell by 2.5% monthly. Also, Rents maintained upward pressure on the inflation basket, with the shelter component of the CPI basket rising 0.3% month-on-month. However, some economists point out that inflation on the services side has slowed, suggesting that consumer demand is declining in response to the rising cost of borrowing and a prolonged period of rising prices. For example, the entertainment services reading was 0.1% monthly, down from 0.5% in September.
The US Federal Reserve pays special attention to inflation caused by excess demand because it is sensitive to rising interest rates. Commenting on the event and its impact. “It was not only the decline in underlying inflation momentum that led to this market reaction, but the composition of the inflation report was also weak,” says Simon Harvey, head of FX analysis at Monex Europe. Adding, “For markets, this was the outcome needed for traders to resume pricing in earlier, more aggressive Fed rate cuts, get into Treasuries, and sell the dollar through the end of the year in a manner similar to late 2022 when core inflation was first beginning to change.”
GBP/USD Trading Outlook
According to the performance on the daily chart below, the general downward trend of the GBP/USD currency pair was broken by moving towards the 1.2500 resistance level. Now, the bulls must gain more positive momentum to strengthen the rebound upward, and this may happen if the British inflation numbers come stronger and the data results come in. Also, US retail sales were led by a lower Producer Price Index reading. Currently, the closest resistance levels are 1.2520 and 1.2600, and it is best to sell them without risking them.
On the other hand, over the same period, the movement of the sterling dollar towards the support level of 1.2330 will be important for the bears to take control again.
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