GBP/USD has come under renewed bearish pressure and declined below 1.2100 in the early European morning on Wednesday. The UK’s ONS reported that the annual CPI declined to 10.1% in January from 10.5% in December and caused Pound Sterling to lose its footing.
GBP/USD has gained traction and climbed to a fresh five-day high above 1.2150 on Tuesday. The near-term technical outlook points to a bullish shift but the market reaction to the US January inflation report should trigger the next directional move in the pair.
The UK’s Office for National Statistics reported earlier in the day that the ILO Unemployment Rate remained unchanged at 3.7% in the three months to December, matching the market expectations. Further details of the UK jobs report revealed that the annual wage inflation, as measured by Average Earnings Excluding Bonus, rose to 6.7% in the same period from 6.5%.
With the initial reaction, the Pound Sterling gathered strength as investors saw the hot wage inflation data as a potential factor that could force the Bank of England to cling to its tight policy stance. Nevertheless, GBP/USD is unlikely to extend its rebound based on this data alone with market participants focusing on the US data.
The Bureau of Labor Statistics is forecast to report an increase of 0.4% in the Core Consumer Price Index (CPI) on a monthly basis in January. At this point, a reading in line with the market expectation might not be enough to provide an additional boost to the US Dollar and allow GBP/USD to hold its ground. The BLS revisions to the CPI basket and rising used car prices at the beginning of the year are widely anticipated to lift monthly core inflation in January.
The immediate market reaction to a monthly Core CPI reading below the market consensus should be straightforward with the US Dollar losing interest and vice versa.