GBPUSD Extends the Downside As UK Inflation Cools Down

Summary:
• The GBPUSD pair has lost some more on Wednesday after the February UK CPI figures read lower than expected ahead of Fed interest rate news.

The US dollar extended its winning streak against the British pound in the European session on Wednesday amidst news that UK inflation cooled more than expected in February.  At the time of writing, the GBPUSD trading pair exchange rate was at 1.2696, having erased 0.20% of its value on the daily chart. The pound remains under pressure as the market awaits the Federal Reserve interest rate decision set to be announced on Wednesday.

UK Consumer Price Index (CPI) reduced by 0.6% to 3.4% year-on-year in February, coming in lower than the forecast estimate of 3.5%. The monthly headline inflation, however, rose from -0.6% in January to +0.6% in February. Nonetheless, that was still lower than the consensus forecast of 0.7%. These readings increase the likelihood that the Bank of England could announce rate cuts as soon as June, as the UK economy approaches the 2% inflation target.

Meanwhile, the US dollar’s upside will continue to find support from US Treasury yields. The rates on benchmark 5-year and 10-year bonds hover around 4.290% as of this writing. Ultimately, however, GBPUSD will be defined by the two major interest rate announcements. Traders have opted to take low-risk positions ahead of the US interest rate announcement, but that could change if the Fed deviates from market expectations.

Most analysts expect the current US interest rates to last through the first half of the year. A deviation from that position could tilt the scales towards the pound ahead of the UK interest rate announcement scheduled for Thursday.  FOMC interest rate projections and economic projections will also influence the market sentiment.

Technical analysis

The GBPUSD trading pair pivot is at 1.2989, with the RSI indicator showing a lack of upward momentum. The sellers will be in control if resistance remains at the pivot mark. Furthermore, extended control by the bears could break the support at 1.2682 and see them test 1.2671. However, a break above 1.2989 will create upside momentum, which could encounter the first resistance at 1.2710. Extended control by the buyers could break that resistance, sending the trading pair to 1.2724.