GBP/USD forecast: signal as it breaks inverse H&S neckline

The  GBP/USD exchange rate spectacular rally continued on Thursday after the UK published strong GDP data. The British pound soared to a high of 1.2870, its highest level since March 8th of this year.

UK GDP and BoE rate cuts

The GBP to USD forex pair continued rising after a report by the Office of National Statistics (ONS) showed that the economy did well in May. https://invezz.com/news/forex/

It expanded by 0.4% in May after remaining flat in the previous month. This growth translated to a year-on-year performance of 1.4%, higher than the median estimate of 1.2%.

Still, other metrics released on Thursday were weaker than estimates. Industrial production rose by 0.2% while the manufacturing number rose by 0.6%. The two were relatively weaker than the expected 0.3% and 0.4%.

These numbers mean that the Bank of England (BoE) has time to wait before starting to cut interest rates. They came a day after Huw Pill, the bank’s chief economist warned that interest rate cuts may take longer-than-expected to come.

He noted that inflation was still a thorn in the flesh for the economy. While the headline Consumer Price Index (CPI) dropped to its 2% target, the core CPI figure remained above 3.4% in May. 

The bank fears that rate cuts could trigger more spending, which will, in theory, lead to more inflation. 

Therefore, the bank could maintain rates steady in August and then point to a cut in its following meeting. In a note, analysts at ING said:

US dollar index sell-off

The GBP/USD pair rallied as the US dollar index continued falling. It dropped to $104.623 on Thursday from this month’s high of $105.50 after a mixed statement by Jerome Powell. 

In his testimony to Congress this week, Powell said that the bank expects to start cutting interest rates if inflation continues falling.

It has welcomed the recent inflation numbers that revealed that prices were falling. The headline Consumer Price Index (CPI) dropped to 3.3% in May while the core figure dropped to 3.4%.

Economists expect the data scheduled for Thursday to reveal that the headline CPI softened to 3.1% while the core CPI remained at 3.4%. If these estimates are correct, it means that the Fed will leave rates unchanged in its July meeting.

The key event to watch will be the Jackson Hole summit that will happen in August. If inflation numbers continue falling, the Fed will use the meeting to signal that a rate cut will happen in September.

The Fed has a tough balancing act to do. While inflation is still at an elevated level, there are signs that the economy is slowing. Data released last week showed that the manufacturing and services PMI numbers dropped below 50 in May. 

GBP/USD technical analysis

The GBP/USD pair has been in a strong uptrend in the past few days. It has moved above the Ichimoku cloud indicator and the supertrend indicators, which is a sign that bulls are in control.

The pair has also risen above the 50-day moving average while the Average Directional Index (ADX) rose to 18.60. Most importantly, it moved above the neckline of the inverse head and shoulders (H&S) pattern.

Therefore, the pair will likely continue rising as buyers target the key resistance point at 1.300 followed by 1.3136, its highest point this year.