GBP/USD bulls come up for air to challenge the bears, but now face a wall of resistance

• US inflation data and UK GDP will be key for GBP/USD this week.
• Bears eye the 1.3520 horizontal support that could be the last defence before a test of 1.3490 swing lows. 

At 1.3559, GBP/USD is up on the day by 11% and has travelled from a low of 1.3507 to score a high of 1.3564 on the day so far. Nevertheless, the greenback is being eyed for prospects of a bid given the perkiness in US yields and the anticipation of US nfla5ion data this Thursday.   

The US dollar stands to gain on a correction in the euro and in continued hawkish sentiment surrounding the Federal Reserve. In the lead up to March's Federal meeting, exceptionally positive US labour data last week, in the form of Nonfarm Payrolls, has put extra focus on this week's Consumer Price Index that has been forecasted at a four-decade high 7.3%. 

The data could cement expectations on whether the Federal Reserve will raise interest rates by a  25 basis point or a 50 basis point at a March review. Money markets are now pricing in more than a 60% probability of a 50 bps rate hike. As a consequence, the US dollar could be in the running for a significant correction in the forex space with the 96 mark in focus as the DXY index. This will ultimately weigh on the pound and leave 1.3490 vulnerable in a breakdown of technical structure as illustrated in the technical analysis below. 

Meanwhile, however, given the widening interest rate differentials between the pound and other major currencies, such as the euro, GBP bears could be hard pushed to run away with it for the time being. In this regard, this week's UK Gross Domestic Product will be a key event for sterling this Friday.

The data, expected by analysts at TD Securities to contract by 0.8% MoM in December, thus bringing GDP below its pre-COVID level once again, will be the first major event after last week's Bank of England interest rate decision.

While the Bank of England delivered a quarter-point hike last week as widely expected, a split vote came as a surprise, as four of the nine Monetary Policy Committee members wanted a 50 basis points move. This leaves the bulls in good stead for the time being. Money markets are now pricing in another 127 bps of hikes over the remainder of the year.

GBP/USD technical analysis

As the hourly chart illustrates, the bulls are attempting to take on the resistance area but without conviction so far. Should they fail at this juncture, the bears will be encouraged to be involved at a discount and will eye a break of the 1.3520 horizontal support that could be the last defence before a test of 1.3490 swing lows.