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This week we've seen GBP/USD consolidate above 1.3320 and there are signs it could go higher.
The pound-to-dollar dropped notably last week in the wake of a run of stronger-than-expected U.S. data, and this week's U.S. inflation data met expectations at 4.2% y/y and confirmed inflation is running well ahead of the Federal Reserve's target of 2.0%.
However, the USD was softer after the report's release, because:
1) The market was primed for a stronger reading, given last week's run of above-consensus data
2) Core inflation was actually softer than expected at 0.2% (down from April's 0.4%).
3) Big rises in monthly inflation a year ago will drop out of the headline data in the coming months which will provide a solid ceiling for headline inflation in the coming months
Given this, it's hard to argue that U.S. inflation is running out of control, which challenges the building narrative that the U.S. dollar's cyclical powers are returning.
"There's really no sign - whatsoever - that U.S. inflation is overheating. That has implications for the Dollar," says Robin Brooks, Senior Fellow at the Brookings Institute.
"Just imagine what'll happen to inflation when the war ends and oil prices fall. I think markets are wrong to price hikes for the Fed. Very wrong," he adds.
Evidence that the inflation shock is contained will encourage the new Chairman of the Federal Reserve, Kevin Warsh, to defend the notion that rates should remain on hold.
Pushback against market bets for at least one hike before year-end would prove a headwind for the USD.
"Looking ahead, the likelihood of a longer period on hold has risen, but the balance of risks still tilts toward easing later this year as growth slows. Diminishing fiscal support and a weak real income backdrop are likely to weigh on household spending in the second half," says a note from the UBS Chief Investment Office.
GBP/USD is now looking better supported in the wake of the above and better insulated against downside.
A climb back towards the flat 100-day moving average at 1.3480 now becomes a feasible bet.
To be sure, the pair is subdued on a multi-week timeframe which means there's a limited prospect for meaningful upside and downside trendiness in the coming days and weeks.
