Another blow for the already struggling GBP/USD on Wednesday, February 15 with the release of better-than-expected US inflation data.
The Pound to Dollar exchange rate fell below key support levels to reach 1.2386 after the Bureau of Labor Statistics announced the CPI measure of inflation for all items rose 0.6% in January in what amounts to the largest increase in prices since February 2013.
"The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase, and advances in the indexes for shelter, apparel, and new vehicles also were major contributors," said the BLS in a report accompanying the data.
The US Dollar index jumped 0.36% on the day to reach 101.60 following the release as the GBP/USD exchange rate slipped to 1.2390 and the EUR/USD rate fell to 1.0529.
The USD rose as investors bet that the inflation would force a number of interest rate rises at the US Fed in 2017.
"Under the current levels of inflationary pressure, all eyes will be on Fed Chair Janet Yellen, with investors pencilling in March for the first rate hike of a possible three," says Paul Sirani, Chief Market Analyst at Xtrade.
The Dollar was already moving higher into the release after US Federal Reserve Chair Yellen confirmed to US lawmakers that the Fed was still looking to raise interest rates more than once in 2017, bets are that inflation will only fuel this pro-USD scenario.
GBP/USD Outlook Fast Deteriorating as Key Support is Tested
Ahead of the release analyst Fawad Razaqzada at Forex.com warned that were we to see any weakness in US macro numbers, then the Dollar could fall back and this could support the GBP/USD. "However if US numbers, especially CPI, comes in stronger then the GBP/USD could drop below 1.2400".
Yet, from a technical perspective, the GBP/USD is well within its current consolidation range between around 1.20 and 1.27.
At the current price of 1.2390, the exchange rate still resides in the upper half of its range and thus has the potential to fall further before it becomes ‘oversold’.
Razaqzada says that if the exchange rate falls below the key 1.2415 support on a closing basis (i.e we must end the day below here) the bias remains slightly tilted to the bullish rather than the bearish side of the argument.
"In fact, the cable may well have already bottomed out when it failed to crack that key psychological level of 1.20 in mid-January," says Razaqzada.
Furthermore, "we do need the cable to break out of its wider range of 1.20-1.27 before the potential double bottom formation can be confirmed. At the moment, there are no signs of that happening with price threatening to break support at 1.2415. If this level gives way then we could see a retest of the 50% retracement level at 1.2345 where it had previously bounced from".