Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2450.
- Add a stop-loss at 1.2600.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.2545 and a take-profit at 1.2625.
- Add a stop-loss at 1.2450.
The GBP/USD exchange rate plunged hard after the strong US inflation numbers complicated the actions of the Federal Reserve. The pair retreated to a low of 1.2520, its lowest swing since December 14th last year.
Potential Fed and BoE divergence
The GBP/USD pair retreated sharply as investors assessed the implications of the strong US inflation figures. According to the BLS, the headline Consumer Price Index (CPI) jumped from 3.2% in February to 3.5% in March, higher than the median estimate of 3.4%.
Core inflation, which excludes the volatile food and energy prices, rose by 3.8%, also higher than the expected 3.7%.
These numbers came a few days after the US published strong jobs numbers. According to the Bureau of Labor Statistics, the economy added over 303k jobs in March, the biggest monthly increase this year. The unemployment rate retreated to 3.7% during the month.
Therefore, these reports mean that the Fed does not need to cut interest rates in the next few meetings. A rate cut would likely lead to higher inflation by boosting borrowing and spending.
In a statement, Larry Summers, a well-respected economist, warned that the red-hot inflation number meant that the Fed could even hike interest rates in the coming meetings.
This explains why the US dollar jumped, bond yields soared to the highest point this year. US equities dipped, with the Dow Jones shedding over 400 points.
Therefore, there is a likelihood that the Fed will diverge from the Bank of England (BoE). Economists believe that the BoE will start cutting interest rates in the next few months since the country’s economy is not doing well while inflation has pulled back sharply recently.
Such a divergence would create a carry trade opportunity where investors move to the higher-yielding US dollar.
GBP/USD technical analysis
The GBP/USD pair crashed hard after the strong US inflation report. It moved from a high of 1.2710 to a low of 1.2520, its lowest swing since December. It also flipped the crucial support level at 1.2540 into a resistance point.
The pair has dropped to the lower side of the Bollinger Bands, signaling that it is getting highly volatile. It has also retreated below the 50-period and 25-period moving averages while the Relative Strength Index (RSI) is nearing the oversold level.
Therefore, the pair will likely continue falling as sellers target the psychological point at 1.2400. The alternative scenario is where it forms a dead cat bounce and retests the psychological point at 1.2600.
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