GBP/USD grinds lower towards 1.3500 with eyes on BOE’s Bailey, US inflation

• GBP/USD remains pressured after stepping back from weekly top, recently sidelined.
• EU files first post-Brexit court case against UK, PM Johnson reacts with “show some common sense”.
• BOE’s Pill cites uncertainty on rate hikes, BOE Governor Bailey was previously criticized for late action.
• US CPI for January, BOE’s Bailey will offer double attack and hence warrant caution.

GBP/USD treads water around 1.3530 during the late Asian session on Thursday. The cable pair refreshed weekly top the previous day before reversing from 1.3589.

The pullback moves, however, struggle amid the market’s anxiety ahead of crucial US Consumer Price Index (CPI) data and speech from the Bank of England (BOE) Governor Andrew Bailey.

Although the US Dollar Index (DXY) remains pressured amid mixed concerns over inflation and the Fed’s future moves, the GBP/USD can’t ignore pessimism surrounding Brexit and UK politics. Also challenging the cable pair are the latest comments from BOE Chief Economic Huw Pill who said that a case can be made for a measured rather than an activist approach to policy decisions.

That said, the White House (WH) conveyed expectations of a higher YoY inflation figure but WH Economic Adviser Brian Deese said that he sees reason to think that factors boosting inflation will moderate over time.

It’s worth noting that the recent Fedspeak, comprising comments from Cleveland Fed President Loretta Mester and Atlanta Fed President Raphael Bostic, does support the March rate-hike but fails to clear uncertainty over the pace of lift.

Elsewhere, the European Union (EU) filed a court case against the UK, the first after Brexit, on ordering the Romanian government to pay compensation to investors who lost out on state subsidies, per the Financial Times (FT). “The referral comes as London and Brussels are locked in talks over possible changes to the Northern Ireland protocol, which governs post-Brexit trade on the island of Ireland,” said the news. Following the news, UK PM Boris Johnson reiterated a warning to trigger Article 16 on conditions "if our friends don't show the require common sense" per UK Express.

It should be observed that UK political jitters over ‘Partygate’ also test GBP/USD bulls.

Amid these plays, the US 10-year Treasury yields pause the previous day’s pullback from the highest levels since July 2019, hovering around 1.930-925% of late. Also portraying the cautious sentiment in the market, as well as challenging gold buyers, is the steady S&P 500 Futures despite Wall Street’s upbeat performance on tech-rally and strong earnings, as well as mixed moves of the Asia-Pacific stocks.

Looking forward, US CPI will be the first to shake GBP/USD prices, expected towards the south if the inflation reading march upbeat forecast. However, BOE’s Bailey needs to defend the rate hike and signal more to ward off the criticism over his late action and for suggesting workers stop pushing for higher wages to defend the GBP/USD buyers. Hence, the pair has more downside risk than the otherwise.

Read: US Consumer Price Index January Preview: Is this inflation different?

Technical analysis

GBP/USD stays within the weekly range between the 21-DMA and 100-DMA. However, the recently downbeat Momentum line favors sellers.

That said, a clear downside break of the 100-DMA level near 1.3500 becomes necessary for the bears before targeting 50% and 61.8% Fibonacci retracement of December-January run-up, respectively around 1.3450 and 1.3385.

On the contrary, the 21-DMA and aforementioned resistance line, close to 1.3545 and 1.3585 in that order, guard the GBP/USD pair’s short-term upside.