GBPUSD dragged down by US, UK data

At the time of writing, GBPUSD is testing a crucial support zone around 1.2760.

This 1.2760 price region marks a notable (38.2%) Fibonacci level from GBPUSD’s June 2021 peak through September 2022 trough.

In more recent months, the 1.2760 area had exerted notable resistance on GBPUSD since December 2023 through early last month (February 2024).

What dragged GBPUSD lower today?

1) Weaker-than-expected UK jobs data

The UK’s unemployment rate ticked higher to 3.9% for the three months through January, which is slightly higher than the 3.8% registered in the three months of Q4 2023.

Average earnings growth (excluding bonuses) also came in slightly below estimates (6.1% vs. 6.2% est.) while February’s jobless claims also rose to 16.8k compared to January’s 14.1k figure.

Today’s set of data suggests that the UK jobs market is cooling, potentially allowing the Bank of England to proceed with rate cuts later this year.

• Markets are now predicting a 55% chance of a BOE rate cut in June (compared to the 51% chance accorded yesterday).
   
• Markets are also predicting a 95% chance that the BOE will lower rates by 75-basis points before end-2024, compared to the 86% odds as of yesterday (Monday, March 11th).

NOTE: A currency tends to weaken when markets sense that its central bank is getting ready to lower interest rates.

Then, on the other side of the Atlantic …

2) Higher-than-expected US inflation

The US February consumer price index (CPI) – which measures inflation – came in slightly above market expectations:

• Headline CPI rose 3.2% compared to February 2023.
  This was higher than the forecasted 3.1% year-on-year figure.
   
• Core CPI rose 3.8% compared to February 2023.
  This was higher than the forecasted 3.7% year-on-year figure.
   
• Core CPI (excluding food and energy prices) rose 0.4% compared to January 2024.
  This was higher than the forecasted 0.3% month-on-month figure.

Even the so-called “supercore” CPI (core services prices excluding shelter) – one of the Fed’s favourite ways of measuring inflation – remains stubbornly elevated at 0.47% month-on-month.

While that 0.47% supercore CPI is lower than January’s shocking 0.85% month-on-month growth, that 0.47% number is still much higher than where the Fed would like it to be, at 0.17%.

0.17% monthly growth would be what the Fed desires to bring US inflation closer to the central bank’s annual target of 2%.

Hence, today’s higher-than-expected CPI prints may delay the Fed’s plans to eventually lower US interest rates.

Today’s US CPI data prompted markets to reduce their bets for a Fed rate cut in June by 6 percentage points, down from yesterday’s 86% to 80% at the time of writing.

NOTE: A currency tends to recover as markets push back bets for interest rate cuts.

Hence, the US dollar firmed up as markets diluted some of the bets for a Fed rate cut in June, which in turn dragged GBPUSD even lower.

Fundamental dampeners added to "technical pullback"

Traders would also be aware that GBPUSD’s 14-day relative strength index (RSI) had already broken into “overbought” territory.

Its 14-day RSI crossed above the 70 line last Friday (March 8th), as this FX pair nicknamed "cable" struck an 8-month high at 1.2839.

Hence, no surprise that GBPUSD has experienced a “technical pullback” so far this week, with today’s fundamental events adding to the selling pressure.

Still, Pound bulls (those hoping prices will go higher) may yet draw strength from some “bullish crossovers”:

• Shorter-term 21-day simple moving average (SMA) appears poised to cross above its longer-term 50-day counterpart.
   
• Shorter-term 100-day SMA appears poised to cross above its longer-term 200-day counterpart.

Perhaps once this technical pullback dissipates, and markets can return to the prior narrative (Fed rate cuts may arrive sooner than the BOE’s), that may help restore GBPUSD back to recent heights above 1.28.

Bloomberg’s FX forecast model now predicts a 76% chance that GBPUSD will trade between 1.2638 and 1.2871 over the next one-week period.