The GBP/USD exchange rate suffered a sharp sell-off this week, plunging from a multi-week high of 1.3790 on July 1 to around 1.3390 at the time of writing. This steep decline in the British pound comes amid renewed dollar strength, driven largely by hotter-than-expected US inflation data.
The forex market is now bracing for more key economic indicators from both the UK and the US, which could further influence the directional bias of the GBP/USD pair. The brokers at Fletrade provide a comprehensive breakdown of this topic in their article.
US Inflation Data Boosts the Dollar
The most significant driver behind the recent bearish momentum in the GBP/USD currency pair has been the release of the US Consumer Price Index (CPI) data for June. The report showed that headline inflation accelerated from 2.4% in May to 2.7%, aligning with market forecasts.
Meanwhile, core CPI, which excludes volatile items like food and energy, increased from 2.8% to 2.9%, slightly below the 3.0% expectation but still reflecting sticky inflation pressures.
Even though the monthly core CPI reading came in at 0.2%, under the forecast of 0.3%, the overall tone of the report leaned toward inflation persistence. This led to a renewed bid in the US dollar, sending the US Dollar Index (DXY) surging past the critical 99.00 level. The DXY’s strength reflects the market’s risk-off sentiment and the belief that the Federal Reserve may maintain restrictive monetary policy for longer than previously anticipated.
UK Inflation in Focus
The next major risk event for GBP/USD traders will be the upcoming UK inflation report, scheduled for later this week. Consensus forecasts suggest that headline inflation will hold steady at 3.4%, while core inflation is expected to remain at 3.5%.
If these numbers surprise to the upside, the Bank of England (BoE) may face renewed pressure to delay any additional interest rate cuts.
So far in 2025, the BoE has delivered two rate cuts, and market participants largely expect another rate reduction later this month. However, persistently high inflation figures could lead the Monetary Policy Committee (MPC) to reconsider the pace of monetary easing, which could inject some short-term bullish sentiment into the British pound.
GBP/USD Technical Analysis: Bearish Continuation
From a technical analysis standpoint, the GBP/USD pair is displaying clear bearish signals on the daily chart. The pair has dropped below several critical levels:
- Support at 1.3430, which was the upper boundary of a cup-and-handle formation, has been broken.
- It has also breached the ascending trendline drawn from the June low.
- The price action has fallen below the 50-day Exponential Moving Average (EMA), confirming a breakdown of short-term momentum.
Meanwhile, the Relative Strength Index (RSI) is sloping downward and is approaching the 30-level, indicating growing bearish pressure and the possibility of the pair becoming oversold. Momentum oscillators continue to favour the downside, suggesting that the path of least resistance remains to the south.
Unless GBP/USD can reclaim the 1.3430 resistance zone, the outlook stays negative. The next downside target lies at 1.3300, a psychologically significant support level that could offer some interim buying interest. However, a breakdown below this figure would likely open the door toward 1.3200 and potentially even 1.3100 in the medium term.
Market Sentiment and Trading Outlook
The current market sentiment surrounding GBP/USD is driven by macroeconomic fundamentals and a resurgent US dollar. As rate differentials widen in favour of the USD, traders are increasingly cautious about holding long positions in the pound. The lack of hawkish surprises from the Bank of England and concerns over the UK’s economic slowdown are weighing further on sterling.
Given the ongoing bearish trend, traders may look to sell GBP/USD on rallies, particularly near the 1.3430 – 1.3450 resistance zone. On the other hand, a sustained break below 1.3300 could encourage more aggressive short positioning, particularly if upcoming US data continues to surprise to the upside.
However, if UK inflation beats expectations or if US data disappoints, we could see a short-term corrective rebound. Such a move would need to be confirmed by a bullish reversal signal on technical charts before shifting sentiment convincingly.
Conclusion
The GBP/USD forex pair is under significant pressure as the US dollar strengthens on the back of robust inflation data and expectations of delayed Fed easing. With crucial UK CPI figures, US PPI, and Fed commentary on the horizon, traders should prepare for increased volatility. The technical structure supports a bearish continuation, but macroeconomic surprises could quickly alter the landscape.
As always, risk management remains essential in this volatile forex environment. Traders should monitor key levels and stay updated on economic releases that could alter the monetary policy outlook for both the UK and the US.
