GBP/USD falls back to its knees as risk sentiment in US session crumbles

• GBP/USD bears are moving back in and have eyes on 1.2251 weekly lows. 
• US dollar remains firm as investors price in Fed rate hikes following strong CPI data. 
• US stocks are under pressure in a risk-off pivot late in the US session. 

GBP/USD is on the backfoot as US session risk sentiment deteriorates. Cable is down some 0.3% at the time of writing around 1.2272 and is extending from a high of 1.2400 to a low of 1.2263. 

The US dollar has moved sharply off its lows, turning positive again for the day as markets digest the inflation data from earlier in the US session. While the data showed that inflation has slowed, underlying price pressures remain elevated which is weighing on investor sentiment and US stocks. 

The Consumer Price Index climbed 8.3%, higher than the 8.1% estimate but below the 8.5% in the prior month. Also, the index rose just 0.3% last month, the smallest gain since last August, the Labor Department said on Wednesday, versus the 1.2% MoM surge in the CPI in March, the most significant advance since September 2005.

However, ''the fact that the CPI is driven by rents and services implies that price pressures are entrenched and may manifest in upward pressure on wages too,'' analysts at TD Securities argued. 

The Dow Jones Industrial Average fell 0.8% giving up earlier gains. The S&P 500 slid 1.3% after increasing 0.5% earlier in the session. The Nasdaq Composite dropped 2.5% and is currently extending intraday declines while the 2-year yield increased to 2.857% and is aligned closely with Federal Reserve's interest rate policy.

''The positive surprise in core prices will not be favourable for currencies not named the US dollar. We think the market is far too premature in reducing the Fed's optionality set for tightening. This should leave the USD resilient for now,'' analysts at TD Securities said. 

The dollar index (DXY), which had touched a four-session low of 103.37 ahead of the report, immediately strengthened to a session high of 104.13 in the wake of the data, just below the two-decade high of 104.19 reached on Monday. However, it has been volatile as traders try to unravel the finer details. Investors have been attempting to assess how aggressive the Fed will be.

Expectations are completely priced in for another hike of at least 50 basis points at the central bank's June meeting, according to CME's FedWatch Tool. The US dollar is making its way back towards the session highs in a firm but slow bullish drift which is weighing on the pound. 

For the week ahead, investors will get another look at inflation data on Thursday in the form of the Producer Price Index for April, with expectations of a monthly increase of 0.5% versus the 1.4% jump in March. On an annual basis, expectations are for a jump of 10.7% compared with the 11.2% surge the prior month.

UK GDP coming up

The UK's growth data for March will be released on Thursday. ''While the real income squeeze likely put substantial downward pressure on GDP in March, we look for strong growth in accommodation and food services to put overall services sector growth at 0.1% MoM (in line with consensus),'' analysts at TD Securities explained. 

''We expect manufacturing growth of 0.5% (mkt: flat), leaving overall GDP growth just in positive territory in the month and at 1% for the quarter.''

GBP/USD technical analysis

The bears have been in control since breaking 1.3670 back in November 2021. The price is making its way into meeting a prior low of 1.2251 which guards a run to mitigate the imbalance of price between there and the 1.2075 May 18 2020 low: