GBP/USD outlook: What now for pound after hot UK CPI?

The GBP/USD and other pound crosses slipped despite UK’s consumer inflation climbing to a 10-month high in January. Prices were driven by rising costs for airfares, motor fuel, food, and the introduction of VAT on private school fees. Traders pared back expectations for rate cuts, now anticipating just two 25 bps reductions this year. But with the cable now near key support around 1.2550-1.2775, could we see a rebound? Meanwhile, the US dollar was trading mixed with the greenback dropping against the high-flying yen, while rising against European currencies. However, the dollar’s failure to rally on the back of the latest trade tariffs and US inflation data from last week, you do have to wonder whether the greenback has formed at least a near-term peak. For that reason, the cable may still be able to recover despite being lower today. So, we maintain a cautiously positive GBP/USD outlook for now.

Why did the pound fall then?

Well, the earlier rebound in the US dollar most definitely played a part, as European stocks fell on concerns over Trump’s tariffs and tensions rising in Ukraine’s peace process talks, with Kyiv feeling left out.

But in regard to the UK CPI, the GBP’s weakness was probably driven by the fact we had lower-than-expected services inflation, a key metric for the BOE. While services inflation ticked up to 5% from 4.4%, it remained below the central bank’s 5.2% projection. The headline CPI itself rose to 3.0% year-on-year, up from 2.5% in December and surpassing forecasts of 2.8%. Food prices saw a sharp increase, rising from 1.9% to 3.1%. Core inflation, which excludes volatile components such as energy and food, climbed to 3.7%—its highest level since April 2024.

The hotter inflation data comes hot on the heels of resilient labour market data from earlier in the week. While the rise in inflation makes a March rate cut less likely, it is unlikely to cause significant concern. The upside surprise was largely down to food inflation, though services inflation came in cooler than expected.

Technical GBP/USD outlook: Key levels to watch

Source: TradingView.com

The GBP/USD has been forming short-term higher highs and higher lows ever since it bottomed out at 1.2100 in January. Now above 1.2500, it has still been showing relative strength. Old resistance at 1.2550-1.2575 broke last week. Now we are testing this area from above. For the short-term bullish to remain intact, it is essential the bulls hold their ground here. If they fail to do so, the next stop could well be the 1.2480-1.2500 zone, which is the next key area of support.

On the upside, the next bullish target is seen around 1.2665, marking the August 2024 low, a level which has been tested and re-tested a few times, lessening its technical importance. Round handles such as 1.2700 and 1.2800 area the next important levels to watch should the bullish trend continue. The latter also ties in with the 200-day moving average.

At current levels, the technical GBP/USD outlook is cautiously positive, as it is still showing bullish characteristics. We need to see broken resistance levels continue to provide support to keep the bulls in charge.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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