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The Forex market remains relatively quiet, but change could be on the horizon. With an imminent release today of UK inflation data, one of the primary drivers of the price of this currency pair is about to reach the market.
Inflation data is typically the major influence on whether central banks want to raise, hold, or cut their interest rates, and the interest rate is a primary driver on the relative value of a currency.
At the time of writing, the inflation data had not been released, so I don’t know what the impact will be – but we will find out soon.
UK Inflation and Global Macro Put Pair in Focus
The GBP/USD currency pair is worth paying attention to right now for several reasons. UK CPI (inflation) data has good potential to surprise, which will be highly likely to influence the relative value of the British Pound.
British political instability has come to a fever pitch, with a strong expectation that the Prime Minister will be forced out and a new leader with an unknown agenda will take over. Coupled with inconsistent economic data releases, this makes the Pound choppy.
Macro and sentiment issues have recent begun pushing the US Dollar into more directional movement, and these issues are in focus with fears over Iran war-driven inflation and resultant high interest rates and yields. The worse sentiment gets, the more the US Dollar tends to rise.
We could be seeing the start of a new long-term trend in the US Dollar as its 10-year and 2-year treasury yields break out to reach new multi-year high prices.
GBP/USD Technical Analysis
I see the price now just before the London open at the time of writing sitting on an area of support which is being defined at the horizontal level of $1.3382. The facts that this was also yesterday’s support, and that the price did not decline much below it, are weakly bullish indicators. The support is likely strengthened at least slightly by the presence of nearby support below at $1.3347. The price has room to rise, with a potentially resistant bearish inflection above confluent with the half number at $1.3450, and then a key resistance level confluent with a very big round number at $1.3500.
What we are seeing now is the market waiting for the British CPI (inflation) data, and I think most participants will be hoping for a higher than expected number, because that will put more hawkish pressure on the Bank of England, meaning higher rates for longer, meaning a higher Pound.
Technical factors will make a long trade easier and probably more predictable. If the data is lower than expected, the price will test the support levels but the price action will probably be choppy and unattractive to trade.
Watch Out for Early Peace or War
When a war ultimatum is given, you expect a final answer at the last minute – this is the nature of life-or-death negotiations. However, it is possible that President Trump might take this opportunity, if he needs an element of surprise in a military strike, to hit Iran today when they would least expect it.
Another possibility is that the agreement of a peace deal is suddenly announced today.
Either of these surprises could send the price moving very strongly higher or lower which could be very uncomfortable for anyone caught in a trade hoping for movement in the other direction. Unfortunately, there is nothing that can be done to mitigate this risk unless you just don’t trade today, apart from making a hedge. It could easily overwhelm the impact of the UK inflation data release.
Maybe the Market Will Ignore UK CPI
So far, I have been talking about a surprise in UK inflation data as something to watch for, but what if the number comes in on the nose or just a fraction off the forecast? If this is the outcome, then technical levels are likely to become more important. In this scenario, as we see the price sitting so comfortably on the support level at $1.3382, I think the outlook for a bullish trade from a launch from that level could be good.
My Take on GBP/USD
I think that the best approach that can be taken here today will probably be to wait for a little while after the UK CPI data release and see how the market reacts after an hour or so. It could be that even if the number is a little low, the price just needs to spend some time below $1.3382 to pick up some bids and get driven higher to form a bullish candlestick. This might falter at $1.3450 but if there is room to trade to that level or to $1.3500 it could look like an attractive trade.
It is hard to see a good short trade unless it’s a bearish reversal from either $1.3450 or $1.3500, with the latter looking very attractive.
Review, Support & Resistance Levels
My previous GBP/USD signal on 19th May was not triggered, but I was correct to highlight the importance of the supportive area below $1.3400.
Risk 0.75%.
Trades must be taken before 5pm London time today only.
Long Trade Ideas
Go long following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.3382, $1.3347, or $1.3300.
Place the stop loss 1 pip below the local swing low.
Move the stop loss to break even once the trade is 25 pips in profit.
Remove 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
Short Trade Ideas
Go short following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.3500, $1.3530, or $1.3550.
Place the stop loss 1 pip above the local swing high.
Move the stop loss to break even once the trade is 25 pips in profit.
Remove 50% of the position as profit when the price reaches 25 pips in profit and leave the remainder of the position to ride.
The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.
There is nothing of high importance scheduled today concerning either the British Pound or the US Dollar.
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