GBP/USD forms head and shoulders amid rising UK inflation

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Feb 17, 2021
  • The GBP/USD declined today even after the relatively strong inflation numbers.
  • UK house prices rose to the highest level since 2016.
  • Focus shifts to the UK retail sales numbers.

The GBP/USD declined to an important support after the relatively strong UK inflation numbers. The pair fell to an intraday low of 1.3860, which is 0.65% below this week’s high of 1.3952. 

GBP/USD
GBP/USD price action

UK inflation

The GBP/USD has rallied by more than 20% in the past few months. Most of these gains were mostly because of the relatively weaker US dollar. Recent interest in the sterling has been because of the Brexit deal, UK’s vaccination drive, and the comments by Andrew Bailey about negative interest rates.

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Data released today provided hints that the bank will indeed not move to negative interest rates. According to the Office of National Statistics, the headline consumer price index (CPI) rose by an annualised rate of 0.7% in January. This was a slight increase from December’s increase of 0.6%. 

The core CPI, which excludes the volatile food and energy products, rose by 1.4% in January. Further data showed that the retail price index rose by 1.4% while the PPI input increased by 1.3%. The PPI output declined by 0.2%. 

While the overall inflation is below the Bank of England’s target of 2.0%, there are signs that prices are picking up. In a note, analysts at ING wrote that:

“For various quirky reasons, UK inflation nudged higher in January, a move that is set to continue and take headline CPI to 2% by year-end. But will this last in 2022? We aren’t so sure, and this implies higher inflation is unlikely to be a major concern for the Bank of England.”

Meanwhile, data by the Office of National Statistics (ONS) showed that the UK house price index rose by 8.5% in January after rising by 7.6% in the previous month. This was the highest increase since August 2016.

Later this week, the GBP/USD will react to the UK retail sales numbers that will come out on Friday.

GBP/USD technical outlook

GBP/USD
GBP/USD technical chart

The GBP/USD price has been on a downward trend since yesterday. On the hourly chart, the price has dropped below the important support at 1.3865, which was the highest level on February 10. The pair has also moved below the 15-day and 25-day smoothed moving averages. Notably, it has also formed a head and shoulders pattern and moved below the 23.6% Fibonacci retracement level. 

Therefore, the pair may continue falling as bears target th38.2% retracement at 1.3800. However, there is also a possibility of a pullback, so you should consider using a forex demo account.

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