Pound’s rise came to naught after the latest data on inflation

The GBPUSD currency pair updated its monthly low yesterday, but by the end of the trading session most of the drawdown was bought back. Today there has been a sharp growth momentum to the level of 1.247 after the release of U.K. inflation data, but the prices rather quickly lost all of Wednesday’s gains. Obviously, market participants continue to expect a decline in the pound against the dollar.

In a different macroeconomic situation, the current rate of price growth in the U.K. might lead to the pound’s strengthening, but now it does not happen. In April inflation slowed from 10.1% to 8.7% against analysts’ expectations of 8.3%. Among all developed countries only Austria has a higher inflation rate. Such figures open the way for even tighter monetary policy.

After the release of today’s price statistics market participants expect the rate hike of 0.25% by the Bank of England in June with almost 100% probability (yesterday the probability was about 80%). However, most forecasts did not change significantly, and the pound is unlikely to get any substantial support. The reason is the deterioration of the U.K. economy.

Take a look at the PMI data released yesterday. Both service and industrial sectors were worse than expected. Anyway, the British financial regulator will soon have to stop the cycle of rate hikes, otherwise it will push the national economy into a recession. And the pound, after its strong rise over the past months, should be corrected.

The nearest downside target for the GBPUSD pair at the level of 1.2345, stated in the previous forecast, remains relevant. The RSI indicator is gradually moving down, but still quite far from the oversold zone and does not prevent the continuation of the GBPUSD correction.

The following trading strategy may be offered:

Sell GBPUSD in the range of 1.24-1.244. Take profit – 1.2345. Stop loss – 1.247.

Traders may also use the Trailing stop instead of the fixed Stop loss at their discretion.