- The UK economy grew in February, indicating a gradual exit from its shallow recession.
- After the US inflation report, investors have changed their outlook for Fed rate cuts.
- Traders pushed back the timing for the first BoE cut to August.
The current narrative in the GBP/USD outlook paints a bearish picture. Despite glimpses of growth in the UK economy for the second consecutive month, the pound finds itself locked in a downward spiral against a resurgent dollar. For the past few days, the dollar has rallied after the CPI report confirmed fears that inflation has stalled.
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The UK economy grew in February, indicating a gradual exit from its shallow recession. However, investors mostly ignored the report as they continued digesting recent US inflation data.
After the US inflation report, investors have changed their outlook for Fed rate cuts. Before the report, there was an over 50% chance that the Fed would cut rates by June. However, that has changed with expectations for the first cut now in September. Such a significant shift led to a rally in yields and the dollar, putting pressure on the pound.
For months, the GBP/USD pair has had an edge over most G10 currencies due to a hawkish Bank of England. However, the playing field has changed. The Fed is now in a more hawkish position than the BoE, given the recent data.
Meanwhile, the Bank of England has grown more dovish as inflation in the UK has declined at a much faster-than-expected rate. Investors are now fixing their eyes on next week when the UK will release inflation and labor market data. Nonetheless, after the US inflation report, traders pushed back the timing for the first BoE cut from June to August. This is still ahead of the Fed, which is weighing on the GBP/USD price.
GBP/USD key events today
- US consumer sentiment
GBP/USD technical outlook: Channel breakout
On the technical side, the GBP/USD price has broken out of its bullish channel and is on a solid downtrend. The trend reversed when the price met the 1.2700 key resistance level, where bears took control with a bearish engulfing candle.
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Moreover, the price broke below the 30-SMA and the RSI below 50. The strong bearish momentum continued until the price broke below the channel support and the 1.2551 support level. The bears are now targeting the 1.2500 support level, where the decline might pause for some time.
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Saqib Iqbal
