- Pound Sterling vs US Dollar surges after US CPI data but then gives up gains to trade back down at 1.2600.
- US headline inflation numbers came out at a lower-than-expected 4.9% pace on a YoY basis.
- The data gives the broader long-term GBP/USD uptrend impetus to extend.
The Pound Sterling (GBP) rallies sharply versus the US Dollar (USD) after the release of US Consumer Price Index (CPI) data for April on Wednesday. The pair failed to hold onto its gains, however, and pulled back down to close to the 1.2600 level during the latter part of the US Session.
The GBP/USD pair is in a bullish long-term technical uptrend, advantaging long over short holders.
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GBP/USD market movers
- US CPI inflation dips to 4.9% YoY in April, missing expectations of 5.0%. This reflects slowing inflationary pressures, and counter-intuitively weakens the US Dollar (strengthening the GBP/USD), as it makes it even more likely the Federal Reserve (Fed) will leave interest rates unchanged.
- The Pound gains versus the US Dollar due to a widening monetary policy divergence since in the UK interest rates are still expected to rise substantially higher, and currencies that have higher interest rates to benefit from greater demand.
- Apart from the headline YoY figure, the CPI release came out as expected: rising by a faster 0.4% rate MoM in April, and for Core CPI rising 0.4% MoM and 5.5% YoY.
- The Pound Sterling will be impacted by the outcome of the Bank of England (BoE) policy meeting on Thursday. A 25 bps interest rate hike is now expected with almost 100% certainty. What is less certain is the bank’s forward guidance, BoE Chairman Andrew Bailey’s comments in the press conference, and the distribution of member votes.
- The distribution of voting at the BoE’s last meeting was 7-2, with seven policymakers voting for a 25 bps rate hike and two voting for no change. If the distribution changes either way that will impact GBP with a decrease in the ‘no-change’ camp lifting GBP/USD and vice versa for an increase.
- US Treasury bond yields have risen for four consecutive days, providing the US Dollar with some support, but yields are pulling back slightly on Tuesday, which could be a slight headwind for the USD.
GBP/USD technical analysis: New leg in uptrend unfolds
GBP/USD broadly keeps extending its established uptrend making progressively higher highs and higher lows, and this is likely to continue favoring Pound Sterling longs over shorts.
The shooting star Japanese candlestick reversal pattern on GBP/USD that formed on Monday at the new year-to-date (YTD) highs has failed to obtain confirmation. Tuesday’s bullish close shows a lack of bearish follow-through and severely reduces the validity of the reversal. The surge post-CPI has now almost reclaimed the YTD highs and further invalidated the pattern.
Given the overall trend is bullish, the exchange rate is likely to continue rallying. The May 2022 highs at 1.2665 provide the first resistance level, but once breached it opens the way to the 100-week Simple Moving Average (SMA) situated at 1.2713, and finally at the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1.2758. All provide potential upside targets for the pair. Each level will need to be decisively breached to open the door to the next.
Decisive bearish breaks are characterized by long daily candles that break through key resistance levels in question and close near their highs or lows of the day (depending on whether the break is bullish or bearish). Alternatively, three consecutive candles that break through the level can also be decisive. Such insignia provide confirmation that the break is not a ‘false break’ or bull/bear trap.
It would require a decisive break below the 1.2435 May 2 lows to challenge the dominance of the uptrend and suggest the chance of a bear reversal.
The Relative Strength Index (RSI) is in the mid 60s at the time of writing after peaking in the upper 60s on May 5. This suggests a mild bearish divergence may be developing. If RSI remains below 68 at Wednesday’s close it will confirm a bearish divergence and indicate some underlying weakness. This alone, however, would not be enough evidence to conclude a reversal was in the making.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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