GBP/USD forecast: Traders eye $1.25 despite hotter UK inflation

The US dollar held onto its gains heading into the European close, even if we saw a wobble in stock markets shortly after the open on Wall Street. The escalation in Russia-Ukraine conflict has had minimal impact on FX markets. The initial safe-haven rally has dissipated quickly, with the USD/JPY back well above the 155.00 handle and at intervention territory again. Meanwhile, the UK's higher-than-expected inflation data has likely ruled out a December rate cut by the Bank of England, but the GBP/USD has nevertheless been unable to hold onto its earlier gains. Thus, the GBP/USD forecast remains unchanged as we expect to see further modest selling pressure until the dollar tops out. I also think that the market’s pricing of UK interest rates is far too hawkish given the state of the economy. A drop to $1.25 looks increasingly likely.

Pound: Inflation Holds Back BoE Cuts

The pound was in focus this morning, after UK CPI data came in hotter than expected for October, rising to 2.3% from 1.7% against expectations of +2.2% y/y. Core CPI was even hotter at 3.3%. But traders sold the initial GBP/USD rally, knowing full well that the Bank of England is more focused on services inflation, where a modest rise to 5.0% y/y still aligns with their forecasts.

Still, after the latest CPI data, it is difficult to see the BoE taking action again in December. But more easing could follow in early 2025, potentially in February, as the economy warrants looser policy.

US dollar remains supported

For now, it looks like GBP/USD’s path remains tied to US dollar more than the GBP. Given the prevailing bullish trend for the USD, there is little scope for significant near-term gains in the GBP/USD, even if it does appear poised for a short-term rebound amid oversold conditions. More on that below. But the dollar rally was largely left unscathed after markets were jolted yesterday by Ukraine’s use of US-supplied long-range missiles on Russian territory, with Moscow threatening a nuclear response. Despite this, the FX market has remained relatively restrained, with the USD/JPY rising and the resuming higher against other currencies.  Markets seem cautiously optimistic, but any further escalation in the conflict could shake this complacency, particularly the euro and to a lesser degree the pound.

Technical GBP/USD forecast: key levels to watch

Source: TradingView.com

At the time of writing, the GBP/USD forecast from a technical perspective looked bearish, given the shape of the candle that it was printing on its daily time frame. Resistance between 1.2665 to 1.2731 was tested and held firm. A break above this zone is needed to tip the balance in the bulls’ favour. Support is seen around 1.2580 to 1.2600 area, give or two a few pips, where the trend line going back to October 2023 comes into play. A breach of this trend line could pave the way for a drop to 1.25 handle. It is worth keeping an eye on the RSI as it gets near oversold levels of 30.0. This on its own does not mean we will see a bounce back, but it does increase the odds of it happening, nonetheless.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R