• GBP/USD analysis: UK CPI and retail sales in focus for pound traders
• US Core PCE Price Index to come later in the week
• GBP/USD technical analysis suggests bullish trend still intact

Welcome to another edition of Technical Tuesday. In this final edition for 2023, we will get technical on the GBP/USD analysis as the pair continues to show bullish price characteristics ahead of a busy next few sessions, before the focus turns to the festive period.

The GBP/USD faces a final test this week before the focus shifts to the festive period. Some of the top-tier data still left for the remainder of 2023 will be from both the UK and US, making the GBP/USD a key pair to watch from both the macro and technical fronts. So far, efforts by Fed speakers pushing back against rate cut expectations have proven futile, with the dollar easing across the board and yields have continued to fall. But the market has taken the BoE a bit more seriously, which has kept the pound supported, for now. Before we delve deeper into the macroeconomics and data, let’s quickly look at the GBP/USD chart.

GBP/USD technical analysis: key levels to watch

Source: TradingView.com

After a 3.8% rise in November, the GBPUSD has been largely contained so far in December. Today’s rally has pushed the cable in the positive territory for the month, suggesting that the underlying bullish trend is still intact heading into year-end. Will it managed to finish the month higher? On the year, it is now up nearly 5.5% following its recent comeback. In July, its 2023 gains were as high as 8.7% before it took a big plunge.

At the time of writing, the GBP/USD was testing the area around the 61.8% Fibonacci retracement level against the drop from July, at just north of 1.2720 area. The recent higher highs and higher lows means the path of least resistance remains to the upside for now. The bullish trend is also objectively confirmed by the rising 21- and 200-day moving averages, with price holding above both.

In the short-term, the next key bullish objective is around 1.2800 to 1.2850 area, where liquidity above last week’s high and the 200-week moving average come together.  

In the slightly longer-term outlook, the July peak at 1.3143 will be main upside target for GBP/USD bulls in Q1 2024, should the US economic outlook deteriorate slightly, or the UK shows surprising resilience.

On the downside, short-term support is seen around the 1.27 handle now, which marks the high from Monday’s range. Below this level, 1.2635 is the next support that was already successfully tested on Monday, followed by the area around 1.25 handle (which is also where we have the 200-day average converging).

GBP/USD analysis: UK CPI and retail sales in focus for pound traders

UK CPI is due on Wednesday followed by retail sales on Friday, both at 07:00 GMT.

The key takeaway point from the Bank of England’s unchanged but divided policy decision last week was that the MPC thinks their job of tackling high inflation is not done yet, with three members voting for another rate hike. This has kept the GBP supported against the USD. The MPC was clearly not comfortable with market pricing of earlier-than-expected rate cuts in 2024, so they pushed back against early rate cuts, unlike the FOMC. The BoE has indicated that interest rates might have to remain high for a bit longer than expected, causing more pain for consumers and businesses. But if we see further evidence of disinflationary process gathering pace, then the BoE might have to act sooner to avoid a severe economic slowdown by unnecessarily keeping rates too high for too long. Thus, this and upcoming CPI reports have the potential to move the pound sharply.

On Friday, we will have UK retail sales data before the focus shifts to US inflation on what will probably be the final important day of the year for the markets. UK retail sales are expected to come in at +0.4% month-over-month following a 0.3% decline the month before.

Fed’s favourite inflation measure to come later in the week

The US economic calendar will be winding down ahead of Christmas and New Year holiday. This week, we will have the last important macro releases of the year. As well as UK CPI and retail sales data, we also have a few data releases from the US to look forward to, including Friday’s publication of the Fed’s favourite inflation measure. Tuesday’s focus will remain on Fed speakers, including Barkin, Bostic and Goolsbee, as well as some housing market data with housing starts (+14.8% m/m vs. +0.2% in October) pointing to a healthy property market.

Despite a slightly stronger CPI report last week, the Federal Reserve caused the dollar to sell off and sent stocks and gold sharply higher after signalling a definitive end to its aggressive rate-hiking. The FOMC projected three rate cuts in the coming year. For the first time since March 2021, policymakers did not foresee any additional interest-rate increases in their projections. But US economic data has remained mixed, and if that trend continues markets may have to re-assess their views and push their rate cut expectations deeper into 2024. The Fed’s favourite inflation measure, the Core PCE Price index certainly has the potential to cause that shift. A weaker print would be welcomed by the markets – and the GBP/USD bulls.

Here’s the full list of the important macro events relevant for the GBP/USD pair to watch this week: