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27.03.2025 12:41 AM
GBP/USD. A Rough Patch for the Pound
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The UK inflation report failed to support the pound—all components of the release came in below expectations. On the one hand, this report is unlikely to influence the outcome of the Bank of England's May meeting; with a high degree of probability, the central bank will leave all monetary policy parameters unchanged. On the other hand, the figures may signal early signs of CPI slowing. If this trend continues, a rate cut could return to the agenda for the June meeting.

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According to the published data, the overall Consumer Price Index (CPI) in monthly terms rose to 0.4% in February (forecast: 0.5%). Year-over-year, headline CPI slowed to 2.8% (forecast: 2.9%). Core CPI, which excludes energy and food prices, also underperformed, falling to 3.5% y/y (forecast: 3.6%) after a sharp spike to 3.7%.

The Retail Price Index (RPI), which employers use in wage negotiations, was also disappointing. Month-over-month, it rose to 0.6% (forecast: 0.8%), and year-over-year, it fell to 3.4%. Most analysts expected it to remain at January's level of 3.5%.

What do the figures tell us? On one hand, inflation has stopped accelerating—that's a fact. Yearly inflation indicators pulled back. On the other hand, inflation is still worryingly high. For instance, headline CPI may have retreated from its near-yearly high (3.0%), but it still sits well above the local low recorded in September (1.7%). February's 2.8% reading is above the BoE's 2% target.

Therefore, we can be fairly certain the BoE won't ease monetary policy at its May meeting. Policymakers may acknowledge some progress in fighting inflation, but not enough to shift their tone significantly. One report isn't enough; a longer-term trend is needed.

This ambiguity suggests that short positions on GBP/USD are not entirely reliable. It's also worth noting that sellers could not break through the interim support level at 1.2880, corresponding to the middle line of the Bollinger Bands on the daily chart.

Despite additional pressure from UK Chancellor Rachel Reeves, who announced that the country's 2025 GDP growth forecast was cut in half—from 2% to 1%—she cited "global uncertainty," which has "increased significantly" in recent months.

Reeves also stated that the government would reduce welfare benefits and tighten eligibility rules to cut budget spending. Notably, many people under 22 will no longer qualify for disability payments, and access to universal credit and disability benefits will also become more restricted.

According to some analysts, these measures will save only £3.5 billion instead of the £5 billion previously stated—meaning the UK government will need to identify further areas to tighten fiscal policy.

These austerity measures are bearish for the pound, but such fundamental factors typically have only short-term impact (since the effects of fiscal tightening will take time to show). Likely, market participants will quickly digest Reeves's "spring statement" and shift their focus to other fundamentals.

Thus, GBP/USD is in a mixed state. On the one hand, the pair fell on Wednesday for valid reasons—the current fundamental backdrop supports a bearish move. On the other hand, Wednesday's events are unlikely to trigger a prolonged decline. For example, if Thursday's final U.S. Q4 GDP report comes below expectations (i.e., revised downward), GBP/USD bulls will likely regain control and push the pair back toward the 1.29 area.

It's also worth reiterating that bears failed to break below the 1.2880 support level (middle Bollinger Band on D1)—a clear sign of stalling momentum. This casts doubt on the sustainability of short positions. If sellers can't push through this barrier in the short term, long positions will take priority again—especially if the U.S. GDP report disappoints or merely meets expectations. The targets for the upward movement remain the same: 1.2950 (the Tenkan-sen line on D1) and 1.3000.

Irina Manzenko,
Analytical expert of InstaForex
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