GBP/USD rebounds from the post-US CPI low, jumps to mid-1.2300s amid fresh USD selling

• GBP/USD quickly recovered around 75 pips from the post-US CPI slide to the 1.2275 area.
• The USD witnessed selling following the release of a stronger US CPI and extended support.
• Negative Brexit headlines, a bleak outlook for the UK economy should cap any further gains.

The GBP/USD pair reversed the post-US CPI slide during the early North American session and was last seen trading with modest intraday gains, around mid-1.2300s.

The headline US CPI rose 0.3% MoM in April and the yearly rate decelerated to 8.3% from 8.5%. This, however, was still above consensus estimates pointing to a reading of 0.2% and 8.1%, respectively. Adding to this, core CPI, which strips out volatile food and energy prices, climbed 0.6% during the reported month, surpassing the 0.4% expected.

This comes amid tight global supply chains resulting from China's zero-covid policy and the war in Ukraine and suggested that inflationary pressures are likely to remain high in the next few months. Nevertheless, the data reaffirmed bets for a more aggressive policy tightening by the Fed, which was evident from a sharp spike in the US Treasury bond yields.

The US dollar, however, witnessed a typical 'buy the rumour, sell the news' kind of trade and also seemed rather unaffected by a turnaround in the global risk sentiment. This, in turn, assisted the GBP/USD pair to rebound swiftly from the 1.2275 area, though any meaningful upside seems elusive and the attempted recovery runs the risk of fizzling out rather quickly.

Against the backdrop of the Bank of England's gloomy economic outlook last week, the UK economic think-tank - NIESR - warned that Britain is on course to enter a technical recession in the second half of 2022. This, along with negative Brexit-related headlines, should act as a headwind for the British pound and cap gains for the GBP/USD pair, at least for the time being.

A spokesperson for UK Prime Minister Boris Johnson said that Northern Ireland Protocol (NIP) talks are in a serious situation. Britain reserves the right to take further action if solutions cannot be found urgently, the spokesman added further. Separately, an EU official threatened that the EU is ready to suspend its post-Brexit trade deal and might also halt talks regarding Gibraltar if the UK unilaterally revokes the NIP.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has bottomed out in the near term and positioning for a further appreciating move. Nevertheless, spot prices, for now, seem to have snapped a four-day losing streak and are holding comfortably above the YTD low, around the 1.2260 region touched earlier this week.

Technical levels to watch