GBP/USD Analysis: Hot US CPI Drives Cable Back Below 1.2600 – Where Next?

GBP/USD and US CPI Key Points

US CPI came in hotter than expected at 0.4% m/m (3.5% y/y), with the “Core” and “Supercore” measures also accelerating.
Traders are souring on the potential for a June rate cut from the Fed, with the September/November timeframe now looking more likely.
GBP/USD has fallen to test its 200-day MA under 1.2600, with additional support from a rising trend line near 1.2550.

The biggest economic data release of this week – and arguably the whole month – didn’t disappoint in terms of its market impact.

The just-released US Consumer Price Index (CPI) report for March came in hotter than expected at 0.4% m/m (3.5% y/y). Adding insult to injury, policymakers watch the so-called “Core” (excluding food and energy costs) CPI report closely, and that aspect of the release also came in above expectations at 0.4% m/m (3.8% y/y).

In fact, no matter how you slice the data, it’s hard to argue that inflation is falling. Even the tortured “Supercore” inflation measure that Fed Chairman Jerome Powell has drawn attention to in recent months re-accelerated, with the month-over-month reading coming in at 0.65% and the year-over-year reading shooting up to 4.77%, the hottest print since last April.

Source: Bloomberg

For a central bank that was looking for any sign that inflation was continuing to fall toward its target, this report will be a big disappointment for the Federal Reserve. Indeed, according to the CME’s FedWatch tool, the market-implied odds of a rate cut in June have cratered from roughly 50/50 before the inflation report to only a 20% likelihood of a rate cut in H1, and the probability of a the first rate cut now only ticks above 50% in September.

Traders’ reaction to the release – and the attendant risk of higher interest rates – was swift. The US Dollar Index surged 80 pips to test the 2024 highs again, major indices immediately fell by -1%+, and the yield on the 2-year Treasury bill gained a staggering 20bps to approach 5% for the first time since November.

British Pound Technical Analysis – GBP/USD Daily Chart

Source: TradingView, StoneX

Keying in on Cable, GBP/USD has seen an aggressive rejection off previous support/resistance at 1.2700 following the CPI release, falling to sub-1.2600 as we go to press. The pair is now testing its 200-day MA once again, a key long-term measure of a market’s trend. Even if the 200-day MA near 1.2590 gives way, the pair could still find resistance near the 5-month bullish trend line around 1.2550.

With little in the way of UK data on tap this week, GBP/USD will likely take its cue off US releases, including Fedspeak and the minutes from the March FOMC meeting later this week. Looking out a big further, traders should also watch tomorrow’s US PPI report and the UK GDP report along with US Consumer Sentiment data on Friday.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.