GBP/USD Overview. December 18. The Pound Hit by Inflation

[Ben Graham]

The GBP/USD currency pair has been more active over the past two days than the EUR/USD pair. However, it has not shown any super-interesting movements. Essentially, we witnessed a new surge upward on somewhat weak U.S. labor-market data, followed by a correction on a weaker-than-expected inflation report from the UK—and that was it. It is worth noting that inflation figures are not currently significant for the European Central Bank, which has managed to stabilize its rate around 2%. However, they are very important for the Bank of England and the Federal Reserve. The U.S. inflation report will be released today, while the UK report was released yesterday. We will focus on these two indicators, especially given today's BoE meeting.

The UK inflation report showed a slowdown to 3.2%. While there is ambiguity surrounding the U.S. Non-Farm Payrolls, the situation with UK inflation is clear. Inflation is falling for the second consecutive month at a significantly high pace. Of course, this does not mean it will continue to decline for another five months, but it does mean we will likely see the BoE ease monetary policy further today. Will the British pound react to this event? We believe that if it does, the decline will not be strong, as the market is already prepared for this decision. The composition of the Monetary Policy Committee votes will be of much greater importance. Specifically, the distribution of votes in favor of reducing the rate versus maintaining it. In any case, it is important to note that in September and November, the U.S. dollar performed well despite two Fed rate cuts. Why should the pound necessarily drop today if the decision is already essentially known to traders?

We believe that the overall trend and global factors, which remain unchanged, hold greater significance. The Fed has cut the key rate three times, two of which the market has not yet priced in. The pound has been falling for several months without compelling reasons. Thus, we believe that the global upward trend is not cancelled, and its fundamental basis has not changed. Therefore, we still expect further growth of the British currency—not because it is super attractive or because the British economy has no problems, but because the situation in America remains extremely negative.

Separately, we highlight the U.S. inflation report. If it is revealed today that inflation has slowed or is weaker than the forecast (3%), the U.S. dollar may resume its decline, as the Fed will have even more reasons to cut rates for the fourth consecutive time at the January 28 meeting. The labor market, even if it has stopped declining, is not growing as required. Meanwhile, inflation is decreasing (hypothetically). It appears Donald Trump was correct in calling for a key rate cut. Overall, tomorrow's developments could be unexpected for many traders. This week has been quite "crazy," so the main goal is to avoid significant losses.

The average volatility of the GBP/USD pair over the last five trading days, as of December 18, is 77 pips. For the pound/dollar pair, this value is considered "average." On Thursday, December 18, we expect the pair to trade within a range bounded by 1.3308 and 1.3464. The upper linear regression channel is pointing downward, but this is merely a technical correction on higher timeframes. The CCI indicator entered oversold territory 6 times in recent months and formed several "bullish" divergences, consistently signaling a potential resumption of the upward trend. Last week, the indicator formed another bullish divergence, but the week ended with two entries into overbought territory and two "bearish" divergences. Conclusion: a correction within the upward trend.

Nearby Support Levels:

• S1 – 1.3367
• S2 – 1.3306
• S3 – 1.3245

Nearby Resistance Levels:

• R1 – 1.3428
• R2 – 1.3489
• R3 – 1.3550

Trading Recommendations:

The GBP/USD currency pair is attempting to resume its upward trend for 2025, and its long-term prospects remain unchanged. Donald Trump's policies will continue to exert pressure on the dollar, so we do not expect the US currency to appreciate. Therefore, long positions with targets at 1.3489 and 1.3550 remain relevant for the near term while the price is above the moving average. If the price is below the moving average line, short positions may be considered with targets of 1.3306 and 1.3245 on purely technical grounds. The dollar occasionally shows corrections globally, but for a trend to strengthen, it needs signs that the trade war is ending or other global positive factors.

Explanations for Illustrations:

• Support and resistance price levels are marked by thick red lines, where movement may conclude. They are not sources of trading signals.
• The Kijun-sen and Senkou Span B lines are Ichimoku indicator lines transferred to the hourly timeframe from the 4-hour timeframe. They are significant lines.
• Extremum levels are marked by thin red lines, where the price previously bounced. They are sources of trading signals.
• Yellow lines represent trend lines, trend channels, and any other technical patterns.
• Indicator 1 on the COT charts shows the size of each category of traders' net position.

The material has been provided by InstaForex Company - www.instaforex.com