GBP/USD forecast: US CPI in focus as cable hits resistance

The GBP/USD has started to ease back as the dollar continues to make gains against other major currencies. The AUD/USD for example hit a 13-month low overnight, with a dovish RBA and concerns about Chinese demand weighing on the Aussie. Elsewhere, the EUR/USD is again testing waters around the 1.05 level amid speculation that the dollar will retain its yield advantage over the euro and other currencies once Trump’s expected spending spree and tax cuts are delivered next year. In contrast, the GBP/USD has only just started to turn lower again after staging a decent 2.5-week recovery from around 1.25 handle. Showcasing the GBP strength is the struggling EUR/GBP. With the latter testing the 0.82 support area, sterling is therefore trading at its best levels since March 2022 against the euro. But against the dollar, it has been held back. In fact, I reckon there is a good chance we may see the GBP/USD start to head lower again and may even go on to break 1.2500 support, once UK’s services inflation eases more significantly - possibly in early next year. If seen, that would allow the BoE to turn more dovish. So, the GBP/USD outlook remains bearish heading into 2025.

GBP/USD forecast: All eyes on US CPI

It’s been a quiet week on the European data front, with investors firmly focused on two key events: today’s US CPI release, due shortly at 13:300 GMT, and tomorrow’s ECB decision.

US CPI is expected to edge up to 2.7% year-over-year from 2.6%, serving as the final major data release before the Federal Reserve meets next week. While the Fed seems to have shifted its focus away from inflation, any upside surprise to the already elevated consensus forecast of 0.3% month-on-month for core inflation could boost the dollar.

While the December rate decision likely won’t hinge on this CPI print, an unexpectedly hot number could shape the Fed's stance for early 2025. Following Friday's softer-than-expected NFP report, markets are now almost fully pricing in a 25bps December rate cut, up from 70% last week. So far, this hasn’t significantly impacted the GBP/USD direction, but it has kept the upside limited, suggesting investors continue to prefer the dollar because of Trump’s forthcoming policies in 2025 expected to boost spending and cut taxes, thus keeping inflation risks alive.

Pound gaining strength against the euro

Compared to the euro, the pound has had the benefit of a more functioning government and a touch of fiscal stimulus. In contrast, the political gridlock currently gripping parts of continental Europe is a major reason why the euro is struggling. As a result, UK growth prospects for next year look a little brighter than the eurozone’s, although this doesn’t necessarily mean the GBP/USD will rise. Indeed, a potential shift in the BoE’s tone in February, as services inflation cools further, could pose a risk to the pound against all major currencies.

You can watch this video for more analysis on the EUR/GBP as well as the other FX majors I discussed yesterday:

Technical GBP/USD forecast: Key levels to watch

Source: TradingView.com

From a purely technical point of view, the GBP/USD forecast is turning a little bearish again but with the CPI release due, u would probably wait until the data is out of the way before acting my views when it comes to trading the cable.

Anyway, key short-term support is at around 1.2715 area; if we break below here today decisively then this could pave the way for a drop to retest the bullish trend line (that has been re-established after a brief break) around 1.2600-1.26200 area. Below that level, we have the psychologically important 1.25 handle, which is basically where the cable last found support from after a brief breakdown to hit 1.2487 at its lowest point in November.

In term of resistance, the next level to watch in the event price continues to push higher is between the 1.2800 to 1.12870 range. Here, the cable had found both support and resistance in the past and is where the 200-day average also comes into play.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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