GBP/USD outlook: Attention turns to US CPI after stronger UK GDP

The GBP/USD climbed to its best level since March on the back of this morning’s release of UK data, which, among other things, showed a stronger-than-expected rise in monthly GDP and in doing so raised question marks over an August rate cut by the Bank of England. FX traders are now focused on the upcoming release of US Consumer Price Index, which could ignite volatility in the dollar with the greenback having been stuck inside a holding pattern for much of this week, with a slight bearish bias after its data-driven sell-off the week before. Unless US CPI now comes in hotter, the GBP/USD outlook should remain positive heading deeper into the summer months. This is especially the case after the cable broke a long-term resistance trend around the 1.28 handle as investors gave Keir Starmer’s progress in his first week as UK Prime Minister the green light and US data weakened last week.

GBP/USD outlook takes a boost as UK GDP and construction output beat

The pound extended its recent recovery this morning, after UK GDP data revealed a surprising uptick in economic growth for May, potentially dampening the likelihood of an August rate cut. The gains have been supported further by recent optimism surrounding UK politics after the Labour party swept to power in UK elections.

In May, UK GDP expanded by 0.4%, doubling the anticipated 0.2% growth rate and significantly improving from April's stagnant 0%. A notable resurgence in the construction sector played a key role in this positive shift, with the sector rising 1.9% m/m vs. +0.5% expected and more than making up the 1.1% drop the month before.

The stronger growth data, coupled with hawkish remarks from Bank of England officials, has led the market to scale back expectations for a rate cut. BoE chief economist Huw Pill expressed concern over stubborn inflation, particularly in the services sector and rising wages. Consequently, the probability of an August rate cut has dropped to 50%, down from 60% earlier in the week.

As a result, the pound is now trading at its highest level in four months. Will it now climb above 1.29 handle and start heading towards 1.30? Well, a lot now depends on the other side of the cable’s equation: the US dollar.

GBP/USD outlook: Focus turns to US CPI

Get ready for an action-packed rest of the week focused on the US dollar! The spotlight will be on the latest CPI and PPI inflation numbers, along with the University of Michigan’s surveys on consumer sentiment and inflation expectations, all set to make waves on the economic calendar.

Last week's US data didn't quite hit the mark. Although Friday's non-farm jobs report showed payrolls rising by 206,000, beating expectations, revisions for the previous two months brought the three-month average down to its lowest since January 2021. Unemployment climbed to 4.1%, and average hourly earnings grew at their slowest pace since Q2 2021.

For the rest of this week, keep an eye on these key US data releases as they could shake up the GBP/USD exchange rate:

The Consumer Price Index is expected to come down to 3.1% year-over-year from 3.3% previously, with a 0.1% monthly rise. Core CPI is expected to remain unchanged at 3.4% thanks to a 0.2% forecasted rise in monthly data. Last month saw all these measures come in slightly weaker than expected. Last week saw the latest batch of US data also surprise to the downside. Therefore, another weak CPI print today could indicate the disinflation process is back on track, helping move inflation towards the Fed’s target and in doing so, lift the cable further higher.

Once CPI is out of the way, the focus will then shift to Friday’s releases of the Producer Price Index (PPI) and the University of Michigan’s Inflation Expectations and Consumer Sentiment surveys.

The University of Michigan's consumer sentiment index has been on a downward trend, consistently falling short of expectations. Additionally, the UoM's Inflation Expectations survey decreased to 3.0% from 3.3% last month. A continued decline in inflation expectations could lead to lower actual inflation by dampening the wage-price spiral. At least that is what the dollar bears will be hoping to see anyway. If instead we see more signs of inflation persisting, then this will likely support the dollar, especially against weaker currencies like the Japanese yen.

GBP/USD outlook: technical analysis and levels to watch

Before looking at the daily picture, let’s remind ourselves of the bigger macro picture taking shape in the cable by looking at the weekly chart first:

The cable has surged above its bearish trend line that has persisted since June 2021, hinting at a possible significant upward movement. This could drive rates towards the psychologically significant 1.3000 mark, last July’s high of 1.3142, or even higher. Short-term support is identified around 1.2815/20, corresponding to last week’s high when the pair formed a substantial thrust candle. Key support now lies around the 1.2700 level, marking the breakout area. The critical level to watch is last week’s low at 1.2615; a drop below this point would likely negate the bullish breakout.

On the daily time frame, one can see that not only has the GBP/USD broken above its bearish trend line that was in place since July 2023, but that it is also now residing inside a bullish channel, holding comfortably above both its 21-day exponential and 200-day simple moving averages. Key support is now seen in the area between 1.2800 to 1.2845, which will need to be defended today to keep the short-term bullish trend intact. The longer-term bull trend would not be impacted by a drop so long as rates hold inside the bullish flag, with the support trend of the pattern coming in all the way down at 1.2700 or thereabouts.

Thus, the technical GBP/USD outlook mirrors the positive macro backdrop as things stand, making us bullish on the cable.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R