GBP/USD drops to 1.2100 on downbeat UK inflation, focus on US data, yields

• GBP/USD extends the previous day’s pullback from fortnight high to snap two-day uptrend.
• UK CPI slides to 10.1% YoY in January versus 10.3% expected and 10.5% prior.
• Upbeat Treasury bond yields, hawkish Fed speak underpin US Dollar rebound.
• Hopes of overcoming UK’s labor crisis, BoE’s cautious optimism probe Cable buyers.

GBP/USD takes offers to refresh the intraday low near 1.2100, adding strength to the first daily loss in three during early Wednesday, as the UK inflation data disappoints.

That said, UK Consumer Price Index dropped to 10.1% YoY in January versus 10.3% market forecasts and 10.5% previous readings. With this, the headline inflation marks the third monthly decline after rising to the 41-year high in October. More importantly, the Core CPI, which excludes volatile food and energy items, slide to 5.8% on yearly basis compared to the 6.2% expected and 6.3% in previous readings.

Also read: Breaking: UK annualized CPI inflation softens to 10.1% in January vs.10.3% expected

Given the mostly downbeat UK inflation numbers, backed by the previous day’s mixed jobs report, the GBP/USD could witness further downside as the Bank of England (BoE) Officials have recently highlighted the data dependency for further rate hikes

Further, a separate survey of economists from Reuters signaled no more than one rate lift of 25 basis points (bps), in March, before the BoE initiates the policy pivot calls. The same could exert additional downside pressure on the GBP/USD prices, because the Fed policymakers are comparatively more hawkish despite the latest soft US inflation.

Alternatively, the Financial Times (FT) quoted officials familiar with the matter to mention that UK Prime Minister Rishi Sunak and Finance Minister Jeremy Hunt are up for a deal with workers including a lump sum payment by backdating next year's pay award. The same joins the previous attempts of the UK firms to increase the labor pay to underpin the inflation woes and put a floor under the GBP/USD price.

However, hawkish Federal Reserve (Fed) comments and a recovery in the US Treasury bond yields, despite unimpressive US Consumer Price Index (CPI), seem to exert downside pressure on the Cable pair.

Against this backdrop, US 10-year Treasury bond yields remain intact at around 3.75%, after rising three basis points (bps) to refresh a six-week high the previous day whereas the two-year counterpart copies the moves near the highest level since early November 2022 by poking 4.62%, near 4.61% at the latest. That said, the S&P 500 Futures dropped half a percent while tracing Wall Street’s losses and favor the US Dollar’s haven demand, which in turn allowed the US Dollar Index (DXY) to print the first daily gains in three, up 0.27% intraday near 103.55 by the press time.

Having witnessed the initial market reaction to the key UK data, GBP/USD traders should wait for the US Retail Sales and Industrial Production details for January, as well as NY Empire State Manufacturing Index for February, for clear directions. That said, a few central bankers from the Fed and the BoE are also lined up for speeches and may entertain the Cable traders ahead of Friday’s UK Retail Sales.

Technical analysis

GBP/USD pair’s U-turn from the 50-DMA, around 1.2185 by the press time, joins bearish MACD signals and the RSI retreat, to direct sellers towards the weekly support line surrounding 1.2060.