GBP/USD analysis ahead of UK and US consumer inflation data

The GBP/USD exchange rate is in its third consecutive week of losses as the US dollar strength gains steam. It has crashed to 1.2145, its lowest level since October 2023, and about 10% below its highest swing in 2024. So, what next for the GBP to USD exchange rate ahead of the US and UK consumer inflation data?

US inflation data ahead

The pound to USD pair continued falling this week as investors waited for the December inflation data scheduled on Wednesday. 

Economists expect the data to show that US inflation remained steady in December. The average estimate is that the headline Consumer Price Index (CPI) rose to 2.9% in December from 2.7% in November. 

US inflation has steadily increased after bottoming at 2.3% a few months ago, a sign that the situation is worsening. This inflation growth has come from the services sector and other areas like insurance and housing. 

Insurance costs will likely continue rising because of the ongoing fires in Los Angeles, which will cost over $135 billion. Insurance companies will likely raise their costs as claims costs jump.

Housing prices are also expected to continue soaring in the near term. Indeed, there are reports that landlords in California have started price gouging as demand for rental units rise in the state. This trend could continue nationally as housing demand rises.

Therefore, there are concerns that the Federal Reserve will maintain high interest rates for longer this year. Economists expect the bank to deliver just two interest rate cuts this year, much lower than the expected four. 

This trend explains why the US dollar index (DXY) has risen in the past seven straight weeks to $110, the highest level since November 2022. US bond yields have also continued rising, with the 30-year yield rising to 5% for the first time since October 2023. The ten-year and 5-year yields have also continued rising this year.

This trend continued on Friday when the US published strong jobs numbers. According to the Bureau of Labor Statistics (BLS), the unemployment rate fell to 4.1% as the economy added over 256k jobs. 

UK inflation data ahead

The GBP/USD pair has fallen as investors wait for the upcoming UK inflation data and the rising Gilt yields.

Data shows that the ten-year yield rose to 4.9%, its highest level since 2008. The closely-watched five-year yield rose to 4.555%, up from minus 0.16% in 2022. 

These yields have risen as confusion remains on what the Bank of England (BoE) will do this year as the country moves into a stagflation, a period of slow growth and high inflation.

Economists expect this week’s data to show that the headline consumer price index (CPI) rose to 2.6% in December, while the core CPI slipped slightly to 3.5%. These numbers will be much higher than the Bank of England’s target of 2.0%.

The average estimate is that the economy will expand by 0.75% in 2024. As such, the bank may opt for more cuts to offset the slow growth.

GBP/USD technical analysis

The daily chart reveals that the GBP/USD pair has sold off substantially after peaking at 1.3425 in September. In November 2024, the 50-day and 200-day Weighted Moving Averages (WMA) crossed each other, forming a death cross. 

The pair has moved below the key support at 1.2300, its lowest swing since April last year. The Percentage Price Oscillator (PPO) has remained below the zero line, and the relative strength index (RSI) has moved below the oversold level.

Therefore, the pair will likely continue falling. The next point to watch is 1.2040, which was its lowest point in October 2023. It will be followed by a plunge to 1.1800, its lowest point in March 2023.