Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2765.
- Add a stop-loss at 1.2300.
- Timeline: 1-2 days.
Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2300.
- Add a stop-loss at 1.2765.
The GBP/USD exchange rate wavered after the US published higher inflation numbers than expected. It rose to a high of 1.2455, up by over 3% from its lowest level this month as the market reflected on the impact of these inflation numbers.
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US inflation data and impact on the Fed
The GBP/USD rose even after the US released strong consumer inflation data on Wednesday, raising doubts on whether the Fed will start cutting interest rates.
The report revealed that the headline Consumer Price Index (CPI) rose from 0.4% in December to 0.5% in January, higher than the median estimate of 0.3%. This growth translated to an annual inflation growth of 3.0%, also higher than the expected 2.9%.
Most importantly, core inflation, which excludes the volatile food and energy prices, rose from 0.2% to 0.4% and from 3.2% to 3.3%. These numbers mean that US inflation is moving in the wrong direction since the Fed hopes that it will get to its target level of 2.0%.
Therefore, the inflation report means that the Fed will not be in a hurry to cut interest rates as Jerome Powell emphasized in his testimony to Congress. He believes that more cuts should only happen when inflation shows signs of moving back to 2.0%.
US inflation may remain higher for longer now that Donald Trump has restarted his trade war with the top trading partners. He imposed a 25% tariff on imported steel and aluminum and a 10% levy on Chinese goods. Tariffs on Canadian and Mexican goods will go into effect in March unless they reach a deal.
Tariffs are indirect taxes and are highly inflationary since companies often raise prices to compensate for the cost. They may also lead to a slower economic growth as the spending power eases.
GBP/USD technical analysis
The GBP/USD pair has bounced back in the past few days after bottoming at 1.2097 earlier this month. It has moved to 1.2445, a few points above the 23.6% Fibonacci Retracement level.
The pair has also moved above the 25-day moving average, while the Relative Strength Index (RSI) and the MACD indicators have pointed upwards.
Therefore, the pair will likely continue rising as bulls target the 50% retracement level at 1.2765, up by 2.63% from the current level. This bullish view will become valid if the pair rises above the key resistance at 1.2540.
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