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GBP/USD rallies on higher core inflation; what comes next?

By:
on Jan 18, 2023
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  • GBP/USD rallies after the release of December inflation data
  • Core inflation did not decline as market participants expected
  • Both technical and fundamental factors favor more upside

Today’s London session started with the much-awaited December UK inflation data. Central banks’ fight against inflation is one of the main themes in the financial world, so every piece of data matters for understanding the overall trend.

Inflation in the UK is not cooling off, unlike in the United States. Investors expected core inflation, which does not consider energy and food prices, to decline in December. It did not, and this is the one that matters for central banks.

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Core inflation in the United Kingdom remained unchanged at 6.3% in December. However, investors expected a decline to 6.2%, and the GBP/USD exchange rate rallied on the news.

The reason is that more rate hikes are needed from the Bank of England. It appears that the 25bp already priced in is not enough, and investors bought the British pound as a result.

Truth be said, the pound rallied against the US dollar since the flash crash caused by last year’s mini-budget fiasco. From 1.04, it now trades above 1.23 in what looks like a strong bullish rally if we consider the ongoing higher highs and higher lows series.

An inverse head and shoulders pattern appears on the daily chart

The GBP/USD exchange rate hesitated for the first time it met resistance at 1.25. However, the correction looks like just a consolidation as the right shoulder of an inverse head and shoulders pattern.

An inverse head and shoulders pattern is a bullish one. Once the price action climbs above the neckline, seen in black above, it usually retests it before rallying again.

All in all, GBP/USD looks bullish here. Both the technical and fundamental picture sustain the bullish case.

On the one hand, the inverse head and shoulders shows a bullish technical case. On the other hand, the Bank of England might tighten some more, while the Federal Reserve of the United States slowed down the pace of its rate hikes.

All in all, GBP/USD should find buyers on any dip.