FX.co ★ GBP/USD: Important week for the pound

The GBP/USD currency pair is actively regaining its positions, approaching the 1.26 level. The pair has been rising for the third consecutive week after the May drop to 1.2307. On one hand, the British currency has made a modest gain of less than 300 pips in almost a month. On the other hand, the GBP/USD pair has demonstrated an upward trend even during periods of general strengthening of the greenback and may soon reach a new high for the current year (currently set at 1.2680). This price dynamics is primarily driven by inflation growth, with the latest release showing positive results, strengthening hawkish expectations regarding the Bank of England's future actions. The upcoming releases in the next few days may further strengthen or weaken these expectations. The pound's reaction will correspond accordingly, considering that the next meeting of the English regulator is scheduled for the following week.

Inflation revived the pound

First and foremost, it is important to recall that following the previous May meeting, the Bank of England raised the interest rate by 25 basis points, contrary to expectations of maintaining the status quo. However, the regulator indicated that the next rate hike would only occur if inflation indicators continue to rise (primarily focusing on core inflation). The results of the May meeting put pressure on the pound, causing the GBP/USD pair to decline by more than 300 pips over three weeks. However, the inflation report published in May brought the British currency back to life.

In terms of monthly calculations, the overall consumer price index rose to 1.2%, surpassing the forecasted decline to 0.8%. On an annual basis, the indicator declined significantly from the March value (from 10.1% to 8.7%), but still remained in the "green zone" since most experts predicted a more significant decline to 8.2%. However, the core consumer price index, excluding energy and food prices, contrary to expectations of a decrease to 6.1%, jumped to 6.8%. This is the strongest argument in favor of the British currency since the Bank of England has repeatedly expressed concerns about the rise in core inflation.

Hawkish expectations increased in the market following the publication of the inflation report. Some representatives of the Bank of England also voiced corresponding signals. For instance, today, Bank of England policy maker Jonathan Haskel stated in an interview with British media that it is currently not possible to rule out further interest rate hikes, considering the dynamics and stability of inflation.

Many experts have also revised their forecasts regarding the final rate level. For example, currency strategists at Credit Suisse have raised their forecast to 5%. In their opinion, the central bank will increase the rate twice more this year, in June and August, due to the ongoing inflationary pressures in the country.

Awaiting important releases

So, the probability of another round of interest rate hikes following the June meeting is quite high. The upcoming releases in the next few days may either strengthen or weaken hawkish expectations if they come out in the "red zone." The reaction of GBP/USD traders will correspond accordingly.

On June 13, key labor market data will be published in the UK. According to preliminary forecasts, the unemployment rate is expected to rise again to 4.0%. On one hand, the expected increase will be minimal, but on the other hand, an unfavorable trend may be emerging: unemployment will be rising for the third consecutive month.

A similar trend may also be demonstrated by another component of the release. The number of unemployment benefit claims is expected to rise by 20,000, following a 40,000 increase in the previous month. Since March, the indicator has remained above zero, whereas earlier in the year, the opposite trend was observed. However, wages are expected to please GBP/USD buyers. The average earnings level should increase by 6.1% including bonuses, and by 6.9% excluding bonuses. Perhaps, this is the key point of the release: if wages meet at least the forecasted level, the other components of the report will take a backseat.

On Wednesday, June 14, the pound will also see the release of crucial figures. Firstly, we will learn about the growth of the UK economy in April. According to forecasts, the country's GDP is expected to rise by 0.2% on a monthly basis (after a decline of 0.3% in the previous month) and by 0.1% on a quarterly basis. Wednesday will also reveal data on industrial production volume. A negative trend is expected here: -0.2% on a monthly basis and -1.7% on an annual basis.

Conclusions

Overall, there are all prerequisites for the development of an upward trend for GBP/USD. If the aforementioned releases at least meet the forecasts, the question of a rate hike by the Bank of England at the June meeting will remain on the agenda. If the reports surprise with "green readings," the probability of a 25-point rate hike next week will largely increase.

Undoubtedly, GBP/USD traders in the coming days will be keeping an eye on the American currency, which, in turn, awaits the verdict of the Federal Reserve. But once the passions regarding the outcome of the June Fed meeting subside, British events will come to the fore. Therefore, if the aforementioned reports come out in the "green zone," the priority for the GBP/USD pair will remain with long positions.

Currently, the pair is testing the 1.2590 resistance level (the upper line of the Bollinger Bands indicator on the daily chart). The nearest target for the upward movement is the 1.2680 level (this year's high). The main target is 1.2750 (the upper line of the Bollinger Bands on the weekly chart).