FX.co ★ GBP/USD. Awaiting the inflation report

Last week, the GBP/USD pair renewed a 4-month high, approaching the 1.28 level. Such dynamics were influenced not only by the greenback's weakness but also by the British currency's strength, which positively responded to the results of the Bank of England's December meeting.

Unlike the Federal Reserve, the BoE maintained a hawkish stance and did not even rule out another interest rate hike "if necessary." Of course, the likelihood of an additional round of rate hike is low, but the key role here is played by the intention itself, the readiness for decisive actions. While the Fed voiced that it was prepared to do the opposite, i.e., easing monetary policy parameters. This discordance played into the hands of the GBP/USD buyers, allowing them to update a 16-week price high.

However, despite the favorable fundamental background, the bulls could not conquer the 1.28 level. The bulls took profit once the pair reached the mark of 1.2793, and it stopped the bullish momentum. Predictably, the bears took the initiative, organizing a 200-pip correction.

But it seems that traders have not abandoned the idea of conquering the 1.28 level. On Tuesday, the pair overcame the resistance level of 1.2700 (the middle line of the Bollinger Bands indicator on the 4-hour chart) and is heading towards the target of 1.2800. It is worth noting that the growth was mainly due to the greenback's weakness (the dollar index has returned to the 101 level), while the bulls already worked out the BoE's hawkish stance. However, the pound may emerge on Wednesday, thereby providing additional support to the bulls.

The fact is that in the UK, November's inflation figures will be released Wednesday. If the figures fall into the green zone, the British pound could once again come out on top.

But take note that the forecasts do not bode well for the pound. For instance, the Consumer Price Index in November is expected to decrease to 4.3% YoY – the lowest value since October 2021. The core inflation index, excluding volatile energy and food prices, is also expected to show a downward trend – to the target of 5.6% (the lowest value since February 2022). This component of the report has consistently declined for three consecutive months, and November may mark the fourth month of decline.

The retail price index, used by British employers in wage contract negotiations, is expected to decrease to 5.7% on an annual basis. Again, this is another low – the last time the index was at this level was in September 2021. The Producer Price Index is expected to remain in negative territory (-3.1% YoY), as well as the PPI for output (-0.7%).

According to preliminary forecasts, the key inflation indicators are once again expected to demonstrate a downward trend, reflecting the slowdown in inflation in the UK. This kind of result will not support the hawkish sentiment and, accordingly, the pound's growth.

However, we should take note of one nuance. The previous inflation report (for October) also reflected a slowdown in inflation (almost all components entered the red zone), shaping the corresponding market sentiments. GBP/USD traders were ready to hear hints of a dovish nature at the BoE's November meeting or at least assurances that the current tightening cycle is definitely over, and that the rate will be maintained at the current level "as long as necessary" to achieve the inflation target. However, instead, the BoE maintained its hawkish stance, stating that further tightening of monetary policy may be needed "if there is evidence of more sustained inflationary pressure." At the final press conference, BoE Governor Andrew Bailey cast doubt on the belief that the interest rate had peaked – according to him, the central bank still has a lot of work to do to reduce inflation to the target level. Regarding the prospects for easing monetary policy, Bailey was more categorical: he stated that it is still too early to discuss this issue even hypothetically.

Therefore, if the November figures, contrary to the forecasts, turn out to be in the green zone, the pound may once again emerge, and become an "ally" of the central bank. In this case, the pair will not only test the 1.2800 target but also consolidate within the 1.28 figure.

The technical analysis also indicates a preference for long positions. On the 1H, 4H, 1D, and 1W timeframes, the GBP/USD pair is above or between the middle and upper lines of the Bollinger Bands indicator, as well as above all the lines of the Ichimoku indicator. The first target of the upward movement is at the 1.2800 level (upper Bollinger Bands line on the 4-hour chart). The main target is 1.2860 (upper Bollinger Bands line on the daily chart).