The GBP/USD currency pair surged on Wednesday, reflecting a marked shift in investor sentiment after the U.S. released softer-than-expected inflation data. The pair climbed to a high of 1.3300, representing a 1.25% increase from its lowest level this month. Technical indicators, notably a bullish engulfing pattern, reinforce the outlook for continued gains in the short term.
The brokers at Raliplen provide an in-depth analysis of this topic in their latest article.
U.S. Inflation Softens, Boosting GBP/USD
The key driver behind the recent uptick in GBP/USD was the April Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics (BLS). The report showed a notable cooling in inflation, offering relief to investors concerned about persistent price pressures.
- Headline CPI (MoM) rose by 0.2% in April, reversing the -0.1% decline seen in March.
- Annual CPI dropped to 2.3%, down from 2.4%, bringing it closer to the Federal Reserve’s 2.0% target.
- Core CPI (excluding food and energy) rose by 0.2% MoM, consistent with analyst expectations, while the YoY core inflation remained steady at 2.8%.
This data suggests that U.S. inflation is slowing, and that the lagged effect of tariffs introduced during the current US administration may not yet be significantly impacting consumer prices. However, economists warn that as corporate pricing adjustments filter through, price pressures could intensify in the coming months.
Federal Reserve’s Policy Outlook
The inflation report followed a Federal Reserve policy meeting last week, where officials decided to keep interest rates unchanged. The Fed reiterated its wait-and-see stance, citing ongoing uncertainty from geopolitical tensions and tariff-related risks.
Policymakers warned that if tariffs start driving prices higher, it could delay or potentially reverse expectations for a rate cut later in the year. As a result, the U.S. dollar weakened, providing further tailwinds for the British pound.
UK Labor Market Remains Resilient
On the UK side, the Office for National Statistics (ONS) published mixed jobs data. The unemployment rate rose marginally to 4.5% in March, up from 4.4% previously. Despite this, the number of employed people increased by 112,000, indicating resilience in the labor market. Additionally, average earnings grew by 5.6%, suggesting wage-driven inflationary pressures may persist in the UK.
This robust wage growth could influence the Bank of England’s policy direction, especially if inflationary momentum remains sticky, increasing the probability of future monetary tightening.
Upcoming Catalysts: UK GDP and U.S. Retail Sales
Traders are closely watching for Thursday’s data releases, which are likely to inject more volatility into the GBP/USD pair:
- The ONS is set to release UK GDP, industrial production, manufacturing output, and construction output figures for March. These metrics will provide insight into the UK’s economic momentum amid global uncertainties.
- Simultaneously, the U.S. will publish retail sales data, a key gauge of consumer spending and overall economic health.
These data points could either reinforce the bullish bias or provide reasons for a short-term correction, depending on their deviation from forecasts.
Technical Analysis: Bullish Engulfing Confirms Uptrend
The GBP/USD pair exhibits a constructive technical formation:
- After peaking at 1.3433 in April, the pair corrected downward to a support level of 1.3140 on Monday.
- The bounce to 1.3300 on Tuesday confirms a strong reversal signal, catalyzed by the favorable U.S. inflation print.
- The pair has formed a bullish engulfing candlestick, a key reversal pattern that often precedes further upside.
Moreover, the price remains above all key moving averages (50-day, 100-day, and 200-day), indicating strong underlying bullish momentum.
Another technical structure at play is the cup and handle pattern, typically considered a bullish continuation pattern. The recent retracement from April highs represents the handle formation, while the current rally may signal a resumption of the uptrend.
- Immediate resistance lies at 1.3435, marking the upper rim of the cup.
- A break above 1.3435 would signal a technical breakout, opening the door for a move toward 1.3600 and beyond.
- On the downside, 1.3140 remains a critical support level. A break below this level would invalidate the bullish setup and suggest deeper retracement risks.
Conclusion: Bullish Bias Supported by Fundamentals and Technicals
The GBP/USD pair is currently buoyed by a combination of favorable macroeconomic data and positive chart signals. The softening of U.S. inflation, combined with a bullish engulfing pattern and cup and handle formation, supports a bullish near-term outlook.
However, traders should watch for Thursday’s economic releases, which could either confirm or challenge the ongoing rally. As long as the pair holds above key support at 1.3140, the path of least resistance remains to the upside.
