GBP/USD Outlook: Pound Gains as UK Awaits Key Inflation Data

• Weak US data has contributed to a 2% surge in the pound this month.

• Economists expect a sharp drop in UK inflation, from 3.2% in March to 2.1% in April.

• Markets expect two BoE cuts starting in August.

The GBP/USD outlook shows a bullish bias as the pound strengthens ahead of UK inflation data. In contrast, the dollar remained weak after a set of downbeat economic data raised expectations for Fed rate cuts in the previous week.

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Weak US data this month on employment, inflation, and retail sales has contributed to a 2% surge in the pound against the dollar. The reports have also revealed an economic deterioration that could pressure the Federal Reserve to lower borrowing costs. Consequently, there is a higher chance that the Fed will cut rates twice this year. However, policymakers do not seem convinced that this will last. As a result, they have maintained a slightly hawkish tone, emphasizing that inflation was still high. 

Investors are eagerly awaiting the UK inflation report, which will guide the Bank of England’s policy outlook. Economists expect a sharp drop in inflation from 3.2% in March to 2.1% in April, bringing it close to the central bank’s target.

Currently, markets expect two BoE cuts starting in August. At the same time, there is a 55% chance that the central bank will start cutting rates in June. The BoE governor and deputy have said that rate cuts might come in the summer. Therefore, the pound might reverse due to the divergence in policy outlooks between the UK and the US. 

GBP/USD key events today

• BOE Gov Bailey Speaks

GBP/USD technical outlook: Bulls fading near Fib resistance

On the technical side, the GBP/USD price is in a bullish trend, with the price above the 30-SMA and the RSI in bullish territory. The bullish move is heading for the 1.2750 level, which coincides with the 1.618 Fib extension level. However, the bullish move might not go past this resistance because there are signs that momentum is fading. 

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Notably, while the price makes a higher high, the RSI has made a lower high, showing a bearish divergence. Therefore, bulls are exhausted and might give up control at the nearest resistance. In such a case, the price would likely make a deep pullback to retest the 1.2601 key level.

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• Source: https://www.forexcrunch.com/blog/2024/05/21/gbp-usd-outlook-pound-gains-as-uk-awaits-key-inflation-data/