DXY, GBP/USD Analysis

Major Event Risk this Week Includes US CPI and UK GDP

After last week’s stellar jobs print, on paper at least, USD traders gear up for US CPI data for December. Previous NFP prints reveal a trend of downward revisions meaning the hype behind the December beat could also result in a lower final figure. The labour market is resilient but cooling – something the ISM services PMI report will attest to as it revealed a sharp decline in the employment subsection.

The core measure (inflation excluding volatile food and fuel prices) is expected to drop below 4% for the first time since May 2021, while the headline measure is anticipated to rise slightly, from 3.1% to 3.2% year-on-year.

Then, a day later, UK GDP data for November is due and the forecast appears pessimistic. Meagre, non-negative economic growth is desirable for most of Europe at this stage but merely avoiding a contraction is unlikely to provide the pound with a positive boost required to extend cable’s bullish run.

Customize and filter live economic data via our DailyFX economic calendar

US Dollar Basket (DXY) Hesitates Ahead of Major Event Risk

The US dollar see-sawed massively on Friday after the NFP, PMI double-header. Crucially the spike higher fell short of the crucial 103.00 level, ending the day flat. Today, unsurprisingly the dollar trades around similar levels it closed out at last week as traders eye Thursday’s inflation print.

Price action currently resides above the descending trendline which is acting as support but a serious lack of momentum could stifle the bullish breakout, particularly if CPI surprises to the downside. Inflation is heading lower and gaining momentum – something that has emboldened the Fed to lower the median Fed funds rate for 2024 in December’s summary of economic projections.

Therefore, depending on the data, this week could see a continuation of the longer-term downtrend for DXY and a move towards 101.90.

US Dollar Basket Daily Chart

Source: TradingView, prepared by Richard Snow

GBP/USD Consolidation to Hold but Retest of the Recent High Cannot be Dismissed

GBP/USD bullish momentum appears to have stalled, something the MACD attests to. Price action also reveals reluctance to trade above 1.2736 for extended periods of time. Adding to this is the appearance of multiple upper wicks at and just above that very level.

With UK GDP expected to reveal stagnant growth or even a contraction for the three months ending in November, the case for a bullish sterling is difficult to make. However, looking at the dollar, there are few bullish drivers there too and the combination of both could result in a period of consolidation for the pair.

The pound still holds the upper hand from a yield perspective and meaning the pair could avoid support at 1.2585 and trade around current levels and potentially make another move to the recent high at 1.2828.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX