GBP/USD bulls move into a critical zone ahead of US data.

• UK Unemployment Rate data led to a rally in sterling, with the Bank of England in the crosshairs.
• GBP/USD is in the hands of the bulls ahead of an hourly trend line ahead of key Consumer Price Index inflation data on Wednesday.
• GBP/USD bears are watching for a break of the strong trend line support and 1.2170 structure, which could trigger the triggering of a cascade of stops.

The pair GBP/USD it is up 0.6% at the time of writing these lines. Sterling moved from a low of 1.2168 to a high of 1.2300 on Tuesday after UK Unemployment Rate data showed a tight labor market and accelerating wage growth. The Bank of England, BoE, is in the crosshairs in this regard, as it battles inflation at multi-decade highs.

The British Unemployment Rate stood at 3.7%, close to its lowest level in almost 50 years. This figure is in line with the consensus and signals continued rigidity in the labor market. According to the National Statistics Office (ONS), wages, excluding bonuses, increased by 6.4% annually between September and November. Overall, today’s good data should reduce the chances of a 25 basis point hike by the Bank of England (BoE) at its February meeting, and support our call for a 50 basis point hike,” the analysts said. from TD Securities.

UK Consumer Price Index will be key to Bank of England sentiment

Sterling is the best performing G10 currency overnight after the data was released, due to the implication that this could mean higher interest rates for longer from the Bank of England. In addition, the strength of today’s UK earnings data could, along with hawkish comments from Bank of England Governor Andrew Bailey, mean that December UK Consumer Price Index inflation data tomorrow will be the highlight of the week in the forex space.

Bank of England Governor Andrew Bailey said on Monday that inflation looks set to fall markedly this year as energy prices decline. However, he stated that the shortage of workers in the labor market poses a “significant risk” for this scenario.

“I think going forward, the main risk to lower inflation…is the supply side, and in this country in particular, the issue of labor reduction,” Bailey said. to legislators from Parliament’s Treasury Committee.

Wednesday’s ONS inflation data is expected to be the next major trigger for the pound ahead of next month’s BOE meeting. The consumer price index is expected to have eased to 10.5% annually last month from 10.7% in November, according to a survey of economists polled by Reuters.

We expect UK inflation (Consumer Price Index) to ease further, with the headline index falling to 10.5% y/y (market: 10.5%, Bank of England: 10.9%) and the core index declining to a trough five-month forecast of 6.2% yoy (market: 6.2%, Bank of England implied forecast 6.3%),” analysts at TD Securities said.

The analysts added that “our forecast is mainly based on a decline in gasoline prices of around 5% m/m, however, we also expect a notable moderation in the basic goods component, as retailers applied deep discounts in an attempt to to get rid of high stock levels before Christmas”.

Although our headline inflation forecast is well below the Bank of England’s, a sizeable part of that difference is due to lower petrol prices, which the Bank will take into account. Therefore, we believe that data in line with our forecasts continues to support another 50 basis point hike in February,” TD Securities analysts concluded.

All eyes on the Bank of England

Meanwhile, ahead of next month’s meeting, a tenth consecutive rise is expected with money markets pricing a 50 basis point (bp) rise at 65% and a 25 basis point (bp) rise at 35%. bp.

Although the Bank of England has good reason to toughen its tone, there were several instances last year where this failed to boost sterling, given the backdrop of weak investment growth, low productivity and uncertainty about the UK relationship. with the EU after Brexit,” say Rabobank analysts. According to Refinitiv data, money markets are expecting a 25 basis point (bp) rate hike at that meeting, with a 75% chance of a higher rate hike of 50 bp.

GBP/USD Technical Analysis

GBP/USD is on the back of both the downtrend and the corrective uptrend, making the long-term outlook mixed, but potentially bearish in the short term.

Sterling bulls are advancing after the break of the 1.2128 structure from the 1.1841 lows. However, the bulls will have to clear resistance at 1.2294 GBP/USD and then the swing high at 1.2446 if they are to clear any significant hurdles. Instead, this could be a typical distribution scheme that offers bears a discount, resulting in a bite of game recoveries for the next few days:

GBP/USD H1 Chart

On the hourly chart, GBP/USD bears need to break the strong trend line support and structure at 1.2170, which could trigger a cascading stop that triggers a sell-off below 1.2080 to test 1.1900 and below target zones.