GBP/USD on the cusp of a major breakout after strong UK inflation data

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 May 19, 2021
  • The GBP/USD has formed a cup and handle pattern on the daily chart.
  • This sends a signal that the sterling could soon jump above the YTD high.
  • The pair is today reacting to the strong UK inflation data.

The GBP/USD pair is holding steady after the strong UK consumer inflation data. The pair is trading at 1.4180, which is 3.70% above last month’s low of 1.3675. 

GBP/USD
GBP/USD price action

UK inflation rises

The UK economy is having a quicker recovery than what analysts were expecting. Last week, the Office of National Statistics (ONS) said that the UK GDP bounced back by 2.3% in March as the country started its first steps towards fully reopening. On Tuesday, the data showed that the labour market also started doing well as the unemployment rate declined to 4.8%.

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And today, data by the ONS revealed that consumer and producer prices surged in April. In total, the headline consumer price index (CPI) rose by 0.6% in April, in line with expectations. The rate rose from 0.7% to 1.5% on a year-on-year basis. This was better than the median estimate of 1.4%. 

The core consumer price index that excludes food and energy also rose by 0.3% in April leading to an annualised increase of 1.3%. While these numbers are lower than the Bank of England’s target of 2.0%, they are heading in the right direction.

Meanwhile, the retail price index rose from 1.5% in March to 2.9% in April. The producer price index input, on the other hand, jumped by 9.9% while output rose to 3.9%. Therefore, these numbers send a sign that the Bank of England will have cover to start tightening in the near term. In a note, analysts at ING wrote:

“But at this stage we think headline CPI will most likely dip back below target from around April next year. Much will depend on wage pressures, which despite the green shoots appearing in the jobs market, we think will most likely be fairly benign.”

GBP/USD prediction

GBP/USD
GBP/USD technical chart

Turning to the daily chart, we see that the GBP/USD pair has been on a strong upward trend lately. The currency is actually hovering slightly below its highest level this year. At the same time, it has formed a cup and handle pattern, which is usually a bullish signal. The upward trend is being supported by the ascending trendline that is shown in black and the 25-day and 50-day exponential moving averages (EMA). Therefore, the GBP/USD will likely keep rising in the near term as bulls attempt to clear the YTD high.

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