GBP/USD edges higher as GDP outperforms

The British pound is slightly higher on Friday. GBP/USD is trading at 1.2234, up 0.24%. The pound has enjoyed a solid week, with gains of 1.2%.

US inflation drops again

US inflation continues to decline and slowed for a sixth straight month in December. Headline CPI fell to 6.5%, down from 7.1% and matching the estimate. The drop was driven by lower prices for gasoline as well as new and used vehicles. Core CPI showed a similar trend, dropping from 6.0% to 5.7%, which matched the forecast. Inflation is coming down slowly and remains much higher than the Fed’s 2% target, as any Fed member will be quick to point out. Still, it’s clear that inflation is on the right path as the impact of the Fed’s aggressive tightening cycle is being felt in the economy.

The inflation data came in as expected, but the markets were nonetheless delighted and the US dollar sustained losses across the board on Thursday. The Fed was also pleased that inflation continues to downtrend. After the inflation release, Fed member Harker said he supports a 25-basis point hike at the February meeting and expects rates to rise “a few more times this year”, with a 25-bp pace being appropriate. This sounds like an acknowledgment that inflation has peaked, although we won’t be hearing the “P” word from any Fed official, for fear of the markets going overboard and loosening conditions, which would complicate the fight against inflation. Other Fed members have come out in support of a 25-bp hike in February and the CME’s FedWatch has pegged the odds of a 25-bp increase at 93%. Barring some unforeseen event, a 25-bp hike looks like a done deal.

In the UK, GDP for November outperformed, with a 0.1%, gain, above the forecast of -0.2% but weaker than the October read of 0.5%. The broader picture is not pretty, with GDP falling by -0.3% in the three months to November. The UK economy is sputtering and the Bank of England has its work cut out as it must continue raising rates, despite the weak economy, in order to curb high inflation. The BoE meets next on February 2^nd.

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GBP/USD Technical

• GBP/USD tested support at 1.2192 earlier in the day. The next support level is 1.2017
• There is resistance at 1.2290 and 1.2366

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