GBP/USD tests resistance ahead of US CPI & UK GDP data

• GBP/USD holds steady around 1.35
• US CPI is expected to cool to 3.4% YoY vs 3.5% in June
• UK Q2 GDP is forecast to slow to 0.4% QoQ vs 0.6% in Q1
• GBP/USD technical analysis

GBP/USD is holding steady around 1.35 as investors look cautiously ahead to U.S. inflation data today and UK GDP figures on Thursday. For now, U.S. CPI is likely to be the bigger driver for the pair, given the recent shift in Fed rate expectations.

Expectations are for U.S. consumer price inflation to ease to 3.4% year-on-year in July, down from 3.5%, whilst core CPI is expected to fall to 2.5% from 2.6% in June.

The data comes after weaker-than-expected U.S. non-farm payrolls, which showed jobs falling for the first time since February and led the market to rein in expectations for Fed rate hikes.

However, more so than the labor market, the Fed’s focus is arguably more on inflation. After falling 35% across May and June, oil prices jumped 20% in July as the U.S.-Iran ceasefire collapsed and supply concerns returned. The rise in oil prices has brought inflation concerns back, making today’s data more important

According to CME FedWatch, the market is now pricing in a 50% chance of a rate hike in September, down from 57% before the non-farm payroll report.

A hotter-than-expected CPI report could quickly push those expectations higher again, lifting Treasury yields and the dollar and putting pressure on GBP/USD. On the other hand, if inflation comes in lower than expected, the combination of softer payrolls and cooling price pressures could see markets further reduce Fed rate hike expectations, which would give GBP/USD more room to move higher towards 1.36.

UK GDP data

UK GDP will provide the next test on Thursday.

Expectations are for Q2 GDP growth to slow to 0.24% quarter-on-quarter, down from 0.6% in Q1. On a monthly basis, GDP is expected to contract 0.1% in June after rising 0.1% in May.

A weaker-than-expected GDP figure could put some pressure on Sterling, but it is unlikely to have a major impact on the Bank of England's near-term thinking. The BoE remains focused on inflation, particularly with oil prices still volatile and the UK more exposed to energy costs.

The BoE left rates unchanged at its July meeting, although the vote was more hawkish than expected. The pound has also been relatively resilient following the arrival of Andy Burnham as the UK's new Prime Minister.

For GBP/USD, therefore, the immediate focus is likely to remain on the U.S. inflation data. A softer CPI reading could strengthen the case for lower Fed rate expectations and give the pair a chance to push higher, while a hotter print would put the recent recovery under pressure.

Beyond the near-term data, some caution towards the pound is likely to remain ahead of the Budget, which is not due until late October.

GBP/USD technical analysis

GBP/USD has recovered from the 1.32 support zone, rising above the 50 and the 200 EMA, and is testing the falling trend line resistance dating back to the start of the year. 

Buyers supported by the RSI above 50 and the 50 EMA crossing above the 200 EMA will look to rise above the trend line resistance at 1.35. A break above here opens the door to 1.3550, the July high, creating a higher high and turning the chart more constructive. From here, 1.36 comes into focus ahead of 1.3650, the May high. 

On the downside, support can be seen at 1.34, the 200 EMA, with a break below here opening the door to 1.3330, horizontal support, and 1.3280. A break below this level, the late July low, creates a lower low, bringing the 1.32 support zone back into focus.