GBP/USD Outlook US Inflation Puts Lloyds’ 1.34 Recovery Case Under Pressure
The British Pound has fallen towards support against the US Dollar after US inflation, testing Lloyds’ recovery case before UK growth figures and the Budget.
Pound Sterling‘s route back towards $1.34 has become harder after Wednesday’s US inflation release sent GBP/USD down to the support area Lloyds identifies as important to its recovery prospects.
The Pound traded near $1.3159, down 0.74%, putting the bank’s 1.3140-1.3163 support zone under pressure ahead of Thursday’s UK GDP figures.
Pound to Dollar (GBP/USD): 1.319418 (-0.48%)
Euro to Dollar (EUR/USD): 1.115758 (-0.39%)
Dollar to Yen (USD/JPY): 158.33282 (0.00%)
Earlier in the session, Sterling briefly traded above the bank’s upside trigger, but Lloyds requires a daily close above it.
Lloyds says: “A close above 1.3274 would set things up for a bigger bounce, 1.3333 the first objective above, then 1.3400. Neutral here.”
These are conditional technical objectives.
Before the decline, Lloyds had identified a possible reversal pattern: “Indeed, a diamond formation looks to be developing above there, which is typically a reliable reversal signal once complete (there is more room for consolidation, another week perhaps).”
Wednesday’s fall below $1.32 weakens that developing formation, leaving the lower support band as the immediate test.
A crowded Dollar position still needs a catalyst
Before the inflation figures, JPMorgan’s trading desk questioned how much momentum remained behind recent Dollar buying.
“View remains the same here, LOTS of USD have been bought over the last half percent or so and it looks laboured, seems asymmetric ahead of CPI but the retracement in fixed income is pouring a little cold water on that to be fair.”
The release supplied fresh support for the US currency: September core consumer prices rose 0.3% over the month, keeping pressure on the Federal Reserve to address underlying inflation as well as energy costs.
An October hike is still a separate question.
ING’s Francesco Pesole expected a hotter core reading before the release, but said a larger surprise would be needed to transform the immediate policy outlook:
“Markets may marginally increase expectations for an October hike, but for pricing to return above 50% (now 20%) we probably need to see headline close to 1.0% MoM and/or core at 0.4% MoM today.”
The 20% estimate predated CPI.
After the release, the Wall Street Journal reported October hike odds of 49%.
Pesole also noted: “Williams said he still expects another hike this year, but there are signs that inflation will slow and he doesn’t see further tightening in 2027.”
The Budget comes before the longer recovery
JPMorgan sees a separate potential source of Sterling support if the UK can preserve investors’ confidence through its fiscal announcement.
“UK wise I feel like if we can get through the Budget unscratched then we could have a European integration hope trade as Burnham will not leave it alone, and the comments sound pretty positive.”
Closer European ties also underpin BofA’s medium-term Sterling recovery case.
The desk favours GBP/USD over expressing that optimism against the Euro.
“Given how beaten up EUR is I am thinking about cable as the better vehicle to express above view but it is early days yet.”
First comes August GDP, due at 7am on Thursday 15 October, with Sterling already testing support rather than approaching the close Lloyds needs for a larger rebound.
GBP/USD Exchange Rate FAQ
What would open the way for GBP/USD to recover towards 1.34?
Lloyds requires a daily close above 1.3274, followed by progress through intermediate resistance.
Where is the immediate support for the Pound?
Lloyds identifies the 1.3140-1.3163 area, which Wednesday’s decline has brought into focus.
When is the next UK growth release?
August GDP is scheduled for 7am on Thursday 15 October.
