Last week, the Greenback fell to its lowest level versus the Pound in more than a year due to expectations that the Federal Reserve was nearing the end of its rate hiking cycle following the slowdown in U.S. inflation and Labour Market activity.
However, this week, the pendulum swung in favour of the Greenback as the U.K.’s inflation cooled much faster than anticipated, albeit remaining the outlier among G7 countries. U.K. core inflation, which excludes food and energy prices, softened by 20 basis points to 6.9% in June, while the headline inflation cooled even more by 80 basis points to 7.9%. The GBP currency pair reacted swiftly and is down 74 basis points on Wednesday, ahead of the London Trading Session.
The GBPUSD currency pair’s uptrend is under threat as a reversal from the 1.31411 level has sustained, bringing it closer to its 100-day moving average from the upside. The swing low that originated the move higher, at 1.27536, is now within reach, following the pair’s 50% retracement from its swing high or resistance level.
The market’s reaction to the 50% Fibonacci Retracement at the 1.29474 level will likely cement the market’s sentiment to the decline in U.K. inflation. A high volume breakdown below the level could signal that downside momentum is firmly at play. The 1.27536 level could become the pair’s next destination to the downside if the momentum continues to drive the pair lower. In contrast, the 1.31411 level could attract the currency pair if optimistic Pound traders hold down the 50% Fibonacci Retracement level as a support level.
Since markets have already factored in another 100 basis points of Bank of England rate hikes this year, the Pound will likely be supported by higher yields. Despite the U.S. headline inflation slowing to 3%, much closer to the central bank’s target, and economists expecting one more rate hike this year, underlying inflation has remained sticky, prompting further rate hikes by the Federal Reserve, past the 25 basis points expected in July. The 1.29474 level will likely pivot between bullish and bearish sentiment in the short to medium term.
Sources: Office for National Statistics, Reuters, TradingView
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