GBP/USD to Move Toward 1.20 As Inflation Keeps Softening

Posted Wednesday, September 20, 2023 by
Skerdian Meta • 2 min read

GBP/USD closed above 1.2450s last week which is major support zone, down around 8 cents from its top at about 1.3150. But the decline continued and this pair fell below 1.24. On the daily chart, we can see that the 200-day Simple Moving Average (purple) is present at the 1.2450 level, which has traditionally served as a strong support and resistance level, the drop came to an abrupt halt. This level was breached and the downturn persisted even though there was no recovery from this support zone.

We have seen a couple of attempts to bounce higher, but they have been pretty weak and have failed to reach the 1.2450 level, returning back down. The price is sticking to the 200 SMA and if something can’t go up it will eventually end up down, which is a bearish signal.

So, GBP/USD has been on a downward trend since July, and selling have been outnumbering buyers as the economic data from the UK shows the economy heading toward a recession, further strengthening the case for further declines to 1.20. The most recent jobs report included unfavorable findings such as a higher unemployment rate, negative payroll change, and employment change. Although, today’s CPI report showed that inflation jumped higher in August, although this will only make things worse for the economy and won’t likely impress the Bank of England when they meet tomorrow.

UK Consumer Price Index Inflation for August

August CPI +6.7% vs +7.0% expected
July CPI YoY was +6.8%
Core CPI Yoy +6.2% vs +6.8% expected
Prior core CPI YoY was +6.9%

It is softer readings across the board, as even the monthly estimates are a miss on expectations. In August, headline inflation moved up by just 0.3% (vs 0.7% estimate) on the month and the lower figures are weighing on the pound as well as bond yields upon release. The good news for the BOE is that food prices are seen falling further and faster, which is the main reason why core prices are also down significantly on the month. This will feed further into a case of one last rate hike for the BOE before pausing.