GBP/USD Exchange Rate Rises Above 1.3000 on Inflation News

As evidenced by the GBP/USD chart, yesterday the exchange rate rose above the psychological level of 1.3000 USD per pound for the first time in 12 months.

The strengthening of the British currency occurred after the release of inflation news. According to ForexFactory:

→ Year-on-year Consumer Price Index (CPI): actual = 2.0%, forecast = 1.9%, previous = 2.0%;

→ Year-on-year Core CPI: actual = 3.5%, forecast = 3.4%, previous = 3.5%.

Thus, analysts' expectations of a slowdown in inflation were not met, giving market participants a reason to believe that the Bank of England's tight policy would continue for a longer period, providing a bullish boost for the GBP.

However, in the second half of yesterday, the bears managed to “extinguish” all the progress from the bullish momentum. A bearish engulfing pattern formed on the chart (shown with an arrow).

Moreover, bearish activity intensified this morning after the release of labour market news. The number of jobless claims (Claimant Count Change) filed in the previous month was 32.3K, whereas analysts had expected 23.4K.

This has clouded expectations regarding the future policy of the Bank of England – whether it will keep rates at the current high level of 5.25%, or start to reduce them.

In any case, the pound exchange rate fell below the psychological level of 1.3000 today, raising the possibility of a false bullish breakout. What can the chart suggest about whether this scenario will actually play out?

According to the technical analysis of GBP/USD:

→ The price is in an uptrend (shown by the blue channel);

→ After yesterday's bearish engulfing, the price is still in the upper half of the channel.

The exhaustion of bullish sentiment seems appropriate in light of the rally from the July low of approximately 3%. If so, we may see weak rebounds (the bulls' inability to resume the rally) from the median line of the channel and its lower boundary.

Key support appears to be the former resistance at the 1.294 level. If the GBP/USD rate can consolidate below this level, it will become relevant to look for patterns to build a descending channel.