Pound closing in on 2-year low

The British pound is down sharply at the start of the week, as US inflation and weak UK numbers are weighing on the pound. In the European session, GBP/USD is trading at 1.2174 down 1.16% on the day. The pound is perilously close to a 2-year low of 1.2155.

US CPI accelerates

The US dollar sprinted higher at the end of the week, as US inflation continued to climb in May. Headline inflation rose to 8.6% YoY, up from 8.3% in April. Core inflation dipped to 6.0%, down from 6.2%, but the slight drop did little to reassure investors that inflation is under control. For the record, the CPI reading marked another 40-year high.

The Fed will have to maintain an aggressive stance, which could mean more 50-bp hikes right through September. The markets have increased bets on a 75-bp hike at this week’s meeting, although it’s unlikely that the Fed will want to surprise the markets in this turbulent environment. If Fed Chair Powell is looking to send a hawkish message to the markets, he could hint at the meeting press conference that a 75-bp increase is on the table if inflation doesn’t ease. That kind of warning would certainly put some wind into the sails of the US dollar.

The US inflation release triggered a sharp rise in US yields which has boosted the US dollar. The dollar index has risen to 104.78, up 0.62% on the day. The index is closing on resistance at 105.00, with support at 1.03.00. The US yield curve continues to flatten, with 2-year and 10-year yields close to an inversion, which is a signal of a recession.

In the UK, today’s data dump left a sour taste. GDP fell by 0.3% MoM in April, after a decline of 0.1% in March. On an ominous note, manufacturing, services and construction all declined, the first time that has occurred since January 2021. As well, Manufacturing Production came in at -1.0% in April, its third straight decline.

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GBP/USD Technical

• GBP/USD is testing support at 1.2215. Below, there is support at 1.2108
• There is resistance at 1.2407 and 1.2514

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