GBP/USD tests key resistance after strong UK inflation data

Written by: Crispus Nyaga
January 20, 2021
  • The GBP/USD pair rose to a major resistance level after the ONS published strong UK inflation data.
  • The headline CPI rose by 0.6% while the core CPI rose by 1.4%.
  • The data came a week after Andrew Bailey warned about negative rates.

The GBP/USD rose sharply after the strong United Kingdom consumer price index (CPI) data. It rose to an intraday high of 1.3720, which is the highest it has been since April 2018. Similarly, the EUR/GBP pair dropped to 0.8855, the lowest level since May last year.

GBP/USD
GBP/USD

Pound sterling rises after better inflation data

In recent weeks, economic data from the UK has been relatively negative. Last week, data by the Office of National Statistics (ONS) showed that UK retail sales dropped at the fastest pace in 25 years in December. That happened as the country continued to deal with the relatively new strain of the coronavirus. 

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Today, the GBP/USD reacted to the positive inflation data from the UK. According to the ONS, the headline CPI moved from -0.1% in November to 0.3% in December. The prices rose by 0.6% on an annualised basis, beating the consensus estimate of 0.5%. This increase was due to higher transport, clothing, and recreational products.

Similarly, the core CPI, which excludes the volatile food and energy products, rose by an annualised rate of 1.4%, beating the median estimate of 1.3%. 

Other measures of inflation like the Retail Price Index and producer price index (PPI) input and output also rose above estimates. 

The GBP/USD rose because the relatively strong consumer prices mean that the BOE will wait before it tweaks interest rates. In fact, in a note, analysts at Capital Economics said that they now expect UK inflation to reach the BOE target of 2.0% by end of the year.

“Together these forces could lift inflation to more than 2 per cent by the end of the year. But ample spare capacity means it will probably settle at close to 1.5 per cent by the end of next year.”

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GBP/USD technical outlook

GBP/USD
GBP/USD technical analysis

The daily chart shows that the GBP/USD is at an important point. The pair is at an important resistance level, where it failed to pass on January 4 and 14. Also, the price is between the ascending channel that is shown in black and is above the 25-day weighted moving average. 

Therefore, the pair will likely break-out higher as bulls target the next resistance at 1.3800. However, a drop below the lower side of the doji pattern at 1.3523 will invalidate this trend. You can take advantage of this prediction using a one of the many CFD trading brokers.