GBP/USD plunges to fresh three-week lows and approaches 1.2300 post-US inflation report

• The GBP/USD tanks close to 180 pips after elevated US inflation data.
• Consumer sentiment in the US has collapsed to a 5-decade low.
• GBP/USD Price Forecast: In the near term will test the YTD low at 1.2155.

The GBP/USD plummets following a hotter than expected US inflation report and extends its losses in the week, dropping from around 1.2500 to fresh three-week lows at around 1.2320s. At 1.2313, the GBP/USD remains on the defensive and would extend its downtrend towards the following week’s Fed monetary policy meeting.

The pound collapses on expectations of aggressive Fed rate hikes

On Friday, the US Bureau of Labor Statistics (BLS) reported that May’s Consumer Price Index (CPI) increased by 8.6% YoY, higher than the 8.3% estimation. Inflation excluding volatile items like food and energy, the so-called Core CPI, also uptick by 6%, smashing expectations. That would likely pressure the Federal Reserve to act aggressively and hike rates faster, despite spurring a recession.

Analysts at TD Securities said that US inflation data should be of “great concern for the Fed” as both readings showed no signs of peaking; instead, inflation is broadening, and they expect prices to rise further. They added, “We expect the Fed to maintain its aggressive tightening bias in the months ahead, look for the Committee to hike rates by 50bp both next week and in the July FOMC meeting, and believe a 50bp hike in September may not be out of the question.”

Later in the day, US consumer sentiment also printed a dismal reading, nosediving to a 50-year low reading, with the UoM survey sliding to 50.2 vs. 58.4 in May. The University of Michigan’s survey also collects inflation expectations, with prices expected to rise by 5.4% over the next year, higher than 5.3% in the previous study. Regarding price expectancy in the next five to 10 years, the poll shows an advance of 3.3%.

GBP/USD Price Forecast: Technical outlook

The GBP/USD is accelerating its downtrend and is testing the May 17 daily low at 1.2313. The Relative Strength Index (RSI) is aiming lower, and despite the GBP/USD’s aggressive drop, it still has enough room before reaching oversold readings.

The GBP/USD next support would be the figure at 1.2300. Once cleared, the next support would be 1.2200, followed by the YTD low at 1.2155.