GBP/USD Looks Fragile Ahead of US PCE Data

GBP/USD, BRITISH POUND – Outlook:

• GBP/USD has been hovering in a range since the start of the year.
• However, the pair is beginning to look fragile as it tests key support.
• What is the outlook and what are the signpost to watch?

The British pound is looking vulnerable as it tests crucial support against the US dollar ahead of the key US personal consumption expenditure price index data later today.

GBP/USD is near a vital converged floor of around 1.1840, including the early-January low, the 200-day moving average, and the lower edge of the Ichimoku cloud support. On the daily charts, the Plus Directional Movement Index (DMI) and Minus DMI remain below 25, pointing to range continued range conditions.

Price Facts, Sentiment, Narrative

However, the uptick in downward momentum on intraday charts raises the odds of a break below 1.1840 – see the 240-minute color-coded candlestick chart based on trending/momentum indicators.As highlighted in the previous update, any break below would trigger a minor double top (the December and January highs), potentially opening the way toward 1.1250. More importantly, such a break would disrupt the higher-top-higher-bottom pattern formed since September.

GBP/USD Daily Chart

Chart Created Using TradingView

The UK economy narrowly avoided a recession in the fourth quarter of last year, but recent upbeat UK manufacturing, services, and retail sales data indicate the economy could be more resilient than the actual numbers suggest. Money markets are starting to price in a third BOE rate hike to 4.75% by this summer (from the current Bank Rate of 4.00%), compared with two rate hikes before the turnaround higher in UK data from last week.

GBP/USD 240-minute Chart

Chart created by Manish Jaradi using Metastock

Meanwhile, recent strong US data have prompted markets to price in three more Fed rate hikes, with the terminal rate now seen slightly above 5.30% by July. So far, the BOE hinted rates are near peak, while the Fed stopped short of indicating a pause at the last FOMC meeting (minutes of the meeting published this week also seemed to carry a hawkish tilt).

GBP/USD 240-minute Chart

Chart Created Using TradingView

Given that markets are fully pricing in 3 Fed rate hikes compared with 2 BOE rate hikes, the balance appears to be tilting in favour of USD. In this regard, US personal consumption expenditure price index data, Fed’s preferred inflation measure, due later today could provide some cues. US core PCE Index likely dropped to 4.3% on-year in January from 4.4% previously, but likely rose 0.4% on-month from 0.3% previously. A stronger-than-expected print could weigh on GBP/USD.

— Written by Manish Jaradi, Strategist for DailyFX.com