GBP/USD, Gold Outlook: Two Trades to Watch

GBP/USD rises after hot inflation makes a June rate hike a done deal

• UK CPI holds at 8.7%
• BoE rate decision tomorrow
• GBP/USD looks towards 1.2850

GBP/USD is rising after UK inflation is hotter than expected for a fourth straight month ramping up pressure on the BoE to keep raising interest rates.

UK CPPI held steady at 8.7% YoY in May, the same as in April and core inflation unexpectedly rose to 7.1% from 6.8%, suggesting that it still hasn’t peaked. Expectations had been for a headline CPI print of 8.4%.

Delving deeper into the number, used car prices, recreation, and airline tickets were the main culprits suggesting that inflation has moved well beyond food and fuel.

The data comes after hotter-than-expected wage growth data last week and a rebound in the UK economy in April.

While inflation in Europe and the US is cooling steadily, the UK is a clear outlier with inflation still over four times the BoE’s target level.

The data comes ahead of the Bank of England’s interest rate decision tomorrow where the central bank is expected to raise interest rates for a 13th straight meeting to 4.75%.

Markets are fully priced in further hikes to 5.75% by early next year, a level that would plunge the UK into recession. However, economists consider this too aggressive, with just a further 50 basis points of expected hikes.

Meanwhile, the USD will look towards Federal Reserve Jerome Powell’s testimony before Congress for further cues.

GBP/USD outlook – technical analysis

GBP/USD has formed a series of higher highs and higher lows, running into resistance at 1.2850. the level that buyers need to take out in order to extend the bullish run towards 1.30, the psychological level.

On the downside, support can be seen at 1.27, a level that capped gains in May 2022 and May 2023. A break below here opens the door to 1.25 the rising trendline support.

Gold slips ahead of Fed Powell’s testimony

• Powell could hammer home his hawkish message
• US housing starts jump 21.7%
• Gold looks to test 1925 the June low

Gold is edging lower around a three-month low after falling on Tuesday following stronger-than-expected U.S. economic data and as investors look ahead to Federal Reserve Chair Jerome Powell’s testimony before Congress.

In his biannual appearance before Congress Federal Reserve Chair Powell Could offer more keys on the path of monetary policy and interest rates after mixed signals from the Federal Reserve last week.

Fed chair Powell could use his testimony to hammer home its higher for longer message after investors shrugged off hawkish Fed commentary last week when the central bank signaled a higher-than-expected peak rate of 5.6%, up from 5.1%.

The market is pricing in just a 75% chance of one more rate hike before the end of the year, a less aggressive stance than the 50 bps that the Fed signaled.

Little has changed since last week. Housing data yesterday came in much stronger than expected, with new housing starts jumping 21.7% in May, to the highest level since 2016, a data point that could fuel a more hawkish Fed.

As a result, the path of least resistance for Gold could be lower.

Gold Outlook - technical analysis

Gold broke out below its multi-month ascending channel and 1940, an important support level. This and the RSI below 50 keep sellers hopeful of further downside.

Sellers need to break below 1925, the June low, to extend the bearish trend towards 1900, the round number.

On the flip side, should buyers manage to regain 1940, the 100 sma, 1972, the rising trendline resistance could come into play, and 1981, the 50 sma ahead of 2000 round number.