- GBP/USD has gained traction following Tuesday’s choppy action.
- The pair could extend its recovery in case 1.2400 turns into support.
- Markets remain cautiously optimistic ahead of US inflation data.
GBP/USD has gathered recovery momentum early Wednesday after having tested 1.2300 on Tuesday. The technical picture in the short term points to a bullish tilt but the dollar’s market valuation is likely to continue to drive the pair’s action.
Despite the risk-positive market environment during the European trading hours on Tuesday, the more-than-5% decline witnessed in the 10-year UK government bond yield made it difficult for the British pound to find demand. With the greenback coming under selling pressure on Wednesday, however, the pair started to edge higher.
The US Dollar Index, which tracks the dollar’s performance against a basket of six major currencies, is down nearly 0.5% at 103.45 in the European morning.
Later in the session, the US Bureau of Labor Statistics will release the Consumer Price Index (CPI) data for April. The market consensus points to an annual print of 8.1%, down from 8.5% in March. A CPI print in line with analysts’ expectations, or even lower, is likely to cause the dollar to continue to weaken against its rivals in the near term. Furthermore, risk flows should dominate the markets in such a scenario, putting additional weight on the greenback’s shoulders.
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The UK’s FTSE 100 Index is rising more than 1% on the day and US stock index futures are up between 0.9% and 1.3%, reflecting the improving market mood.
On the other hand, GBP/USD could face bearish pressure in case investors start to seek refuge on renewed inflation fears after US data.
GBP/USD Technical Analysis
GBP/USD broke above the descending trend line and the pair’s last two four-hour candles closed above the 20-period SMA. Moreover, the Relative Strength Index (RSI) indicator on the same chart rose above 50 for the first time in more than a week, confirming the near-term bullish bias.
1.2400 (psychological level) aligns as the first hurdle ahead of 1.2450 (50-period SMA). A four-hour close above the latter could open the door for additional gains toward the 1.2490/1.2500 area (former support, psychological level).
On the downside, 1.2340 (20-period SMA) forms dynamic support ahead of 1.2300 (psychological level) and 1.2250 (static level from June 2020).