Data Deluge

The current week includes a slew of key economic releases, which are highlighted by the CPI inflation updates, as well as the latest policy decisions from the central banks of the US and the UK. These are highly consequential events that can not only spur volatility and determine the trajectory of GBP/USD, but can also set the narrative for the upcoming year.

We already got the monthly GDP from the UK earlier today, which showed growth of 0.5% m/m in October, from a 0.6% contraction in the previous month. The employment figures are due on Tuesday and retail sales form the UK and the US are expected later in the week.

These data points come in as the monetary policy landscape is shifting, since most major central banks are looking to moderate the pace of their aggressive tightening and try to assess the economic impact, given the lagging nature of monetary policy. The Bank of Canada has been easing its cycle since the July peak with a full percentage rate hike and last week it opened the door to a pause ^[1]. The Reserve Bank of Australia has also stepped back with three consecutive 25 basis points rate increases. ^[2]

United Kingdom

The Headline Consumer Price Index (CPI) had jumped 11.1% y/y in October and the highest in four decades. The central bank projects a peak at around 11% in the current quarter, so officials will be looking at Wednesday CPI update on Wednesday, a day ahead of their monetary policy decision.

Bank in November, the bank of England had escalated its response to the surging inflation, with a 75 basis points rate hike – the biggest since 1989. However, it had softened its language around the next steps, since it has to balance between the high cost of leaving and a projected prolonged recession ^[3].

The competing data, the unclear rhetoric and the divisions amongst policy maker, create high uncertainty around the next move.

United States

On the US side, CPI inflation had softened in October, as the core reading had eased to +6.3% y/y, from 6.6% previously. More to it, headline CPI had moderated to 7.7% y/y, with the first-sub-8% print since February. So markets will be awaiting the latest figures on Tuesday, ahead of Wednesday Fed rate decision.

The US central bank runs its most aggressive tightening cycle in many decades, after a series of outsized 75 basis points increases. Chair Powell recently signaled a slower pace of hikes, as soon as the upcoming meeting ^[4] and CME's FedWatch Tool prices in a 0.5% move with nearly 75% probability, at the time of writing. ^[5]

Mr Powell though, had shifted focus away from the size of rate changes, towards the period of time for which policy needs to remain restrictive and to the terminal rate, which he expects to be higher than previously expected. As such, investors will comb through the statement and the press conference for more insights around that, as well as the updated projections and the dot-plot.

GBP/USD Analysis

The technical outlook is in the background, as the pair's next leg will be determined by this week's economic data and the outcome of the monetary policy decisions by the Fed and the BoE. In any case, GBP/USD has staged an impressive recovery from its September record lows. This gives it the ability to push for fresh five month highs (current at 1.2345), but bulls will likely need fresh impetus for advancing past 1.2667.

On the other hand, GBP/USD has lost it vigor over the past several days, having faltered above the 1.2300 handle. This creates risk for pressure towards 1.2052, but a strong catalyst will be required for daily closes below the key 1.1890-70 confluence of support.