GBP/USD settles above 1.2250 amid positive market sentiment, UK and US inflation in sight

GBP/USD settles above 1.2250 amid positive market sentiment, UK and US inflation in sight

  • GBP/USD moved its trade pattern comfortably above 1.2250 as risk sentiment strengthened.
  • The Federal Reserve is expected to ease the pace of interest rate hikes next week.
  • A hawkish policy is expected from the Bank of England despite the recession in the UK.
  • The GBP/USD is likely to accelerate its bull run as the RSI (14) seeks to conquer the bullish range.

GBP/USD has comfortably moved its bidding profile above the crucial resistance of 1.2250 at the start of the European session. Cable climbed near 1.2270 and is set to extend its bull run amid a dramatic improvement in market participants’ risk appetite. The risk aversion theme has lost traction as investors applaud expectations of a slower pace of Federal Reserve (Fed) policy tightening rather than focusing on recession fears spurred by belief in higher interest rate spikes.

Meanwhile, the US Dollar Index (DXY) updated its four-day low at 104.50 and is expected to retest the weekly low at 104.11. A significant rally in S&P500 futures after a cautious start in early Tokyo depicts an upbeat risk impulse. The alpha delivered by US Treasuries has returned to a negative trajectory. Yields on the 10-year US Treasury fell to 3.46%.

Investors seek clarification on Federal Reserve policy outlook

At its October monetary policy meeting, the Federal Open Market Committee (FOMC) said the Federal Reserve was actively discussing slowing the pace of policy tightening as escalating financial risks can no longer be ignored. Danske Bank analysts predict another 50 basis point (bp) interest rate hike and a hawkish message from Federal Reserve Chairman Jerome Powell for CY2023. Furthermore, the neutral rate is expected at 5.00-5.25%.

The end of the 75 basis point (bp) rate hike period will give companies a sigh of relief. There is no doubt that interest payment obligations after a 50 basis point rate hike will increase, but the signs of reaching a neutral rate will be cemented.

Bank of England still needs to tighten policy despite UK recession

The consumer price index (CPI) of the United Kingdom raises the bar thanks to the support of several tailwinds. Food price inflation rose to 12.4% in November, driven by an acceleration in staple food prices. Additionally, the recent food supply crisis caused by labor shortages and rising input costs have added fuel to the fire. The UK economy is facing the heat of recession, signaling a contraction in the rate of growth. Despite more downside risks to the economy, Bank of England (BOE) Governor Andrew Bailey is expected to raise interest rates further.

A survey of Bank of England interest rate hike expectations by Reuters indicates the central bank will add another 50 basis points (bps) next week and raise borrowing costs to 3.50% , despite the economy falling into recession. Runaway inflation in the UK requires further policy tightening to exhaust inflationary pressures.

The UK/US consumer price index in full view

Next week, the publication of inflation figures will remain in the spotlight. In the United States, headline CPI is expected to remain unchanged at 7.7%, while core inflation may rise slightly to 6.4%. While data on payrolls and demand in the services sector remained positive in November, inflation in the United States could show a surprise increase, which could trigger volatility in the global market.

In the UK, runaway food price inflation could trigger upward momentum in headline inflation. Therefore, investors should prepare for an upward release of inflation. According to the consensus, headline inflation should climb to 11.5% against 11.1% previously published. While core inflation is perceived to be higher at 6.6%. The higher consensus for headline inflation appears to be supported by exceptional food price inflation.

Ahead of the US inflation data, investors will keep an eye on the Producer Price Index (PPI) numbers. The overall factory price index is estimated at 7.4% compared to the previous publication of 8.0% on an annual basis. Additionally, the core PPI is seen down to 6.0% from the previous figure of 6.7% over a similar period.

GBP/USD Technical Outlook

GBP/USD rallied strongly after testing the horizontal support placed from the November 24 high at 1.2153 on a four hour time frame. The secular and secondary uptrend lines drawn from the September 26th low at 1.0339 and the November 9th low at 1.1334 respectively will continue to support the British Pound.

The advance of the 20 and 50 period exponential moving averages (EMAs) to 1.2211 and 1.2263 respectively adds to the bullish filters.

Meanwhile, the Relative Strength Index (RSI) (14) is eager to conquer the bullish range of 60.00-80.00 which will activate the bullish momentum.

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