GBP/USD forecast: US CPI in focus with dollar eying more gains

• GBP/USD forecast: Sterling remains vulnerable as markets price a more hawkish Federal Reserve
• US inflation data could reinforce expectations for higher interest rates later this year
• GBP/USD faces potential resistance around 1.3410-20 area

 

GBP/USD faces pressure as Fed tightening bets gain momentum

 

The GBP/USD forecast remains tilted to the downside as investors await a crucial US inflation report that could further strengthen the case for tighter monetary policy from the Federal Reserve. While the dollar has already enjoyed a strong recovery over recent weeks, upcoming inflation data may determine whether that rally has further room to run.

 

Financial markets continue to navigate a volatile backdrop. Equity investors have come under pressure, joining the recent crypto selling. Against this backdrop, the dollar remains supportive as a haven asset, while sterling faces challenges from both domestic economic weakness and still-elevated oil prices.

 

US inflation data could reinforce dollar strength

 

The primary focus for currency markets is the latest US consumer price inflation report due to be released shortly. Economists expect headline May inflation to print 4.2% year-on-year from 3.8% in April, while core inflation is forecast to accelerate modestly to 2.9% from 2.8% in the previous reading.

 

Should those expectations be met or exceeded, markets are likely to maintain bets that the Federal Reserve may need to tighten policy further before year-end. Such a scenario would probably keep US Treasury yields elevated and support the dollar across the board.

 

The inflation details themselves will be particularly important. Core inflation remains heavily influenced by housing and services costs, but investors will also be watching for signs that higher prices are beginning to curb consumer demand. Any softer-than-expected core reading could temporarily ease pressure on short-term interest rates and trigger a brief dollar pullback.

 

However, even if inflation surprises slightly to the downside, traders may remain reluctant to aggressively sell the greenback ahead of upcoming producer price data and the next FOMC meeting.

 

With gold and cryptocurrencies also selling off, there has been renewed confidence in the greenback.

 

UK economy struggles to generate momentum

 

Meanwhile, in the UK, economic growth remains fragile, and elevated energy costs continue to cast a shadow over the outlook despite some moderation in prices from recent peaks.

 

Recent PMI surveys painted a concerning picture, with activity slipping into contraction territory. The combination of weak growth and inflationary pressures creates an environment for policymakers that is not easy to address with monetary policy alone.

 

The problem is that the Bank of England appears under little immediate pressure to raise rates. Market pricing suggests investors expect policymakers to remain patient through much of the summer, with only limited tightening anticipated later in the year.

 

The growing contrast between the Federal Reserve and the Bank of England remains a key driver for the currency pair.

 

While investors increasingly speculate that US policymakers may need to respond to persistent inflation, expectations for UK rate increases remain comparatively subdued. This widening policy divergence naturally favours the dollar over sterling.

 

Adding to the challenge, the pound often behaves as a risk-sensitive currency. Periods of heightened market uncertainty typically benefit the dollar’s safe-haven appeal while leaving sterling exposed.

 

For now, therefore, the balance of risks continues to favour the dollar, leaving the GBP/USD forecast biased towards further weakness in the near term.

 

Technical analysis: GBP/USD forecast leans slightly bearish

 

From a technical analysis perspective, the GBP/USD remains modestly bearish, given the series of lower highs that have formed since the pair peaked in January.

 

Since then, we saw another high in early May at around 1.3658, where a double-top pattern developed later that month before prices broke decisively below the former support zone between 1.3500 and 1.3450.

 

 

That area has now turned into resistance, leading to another leg lower on the GBPUSD chart.

 

The pair is currently holding below the 200-day moving average, which comes in around a key resistance zone near 1.3410–1.3420.

 

This 1.3410 to 1.3420 area will be very important in the short term. As long as prices remain below this resistance zone, the path of least resistance for cable is likely to remain to the downside.

 

Short-term support is seen at around 1.3370, marking the high from Monday’s range. We bounced from that level after closing above it yesterday.

 

If that support gives way, then the 1.3305 area could be revisited soon. This is where a double-bottom low has formed, meaning there are likely stops resting below that zone, which could come under pressure if US CPI data beats expectations.

 

Below that level, the next downside target is around 1.3200, with the March 31 low at 1.3159 coming into focus next.

 

If selling pressure continues to accelerate, then the psychologically important 1.3000 handle could also be revisited.

 

In summary

 

All told, the GBP/USD forecast remains tilted slightly bearish. However, downside momentum has been lacking, partly due to expectations that the Bank of England may need to raise interest rates in response to rising energy prices. That said, the US dollar has strengthened notably against several currencies over the past couple of weeks. As a result, the cable could succumb to renewed dollar strength and move lower, especially if oil prices continue to spike higher, or if upcoming inflation data proves to be hotter than expected.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R