Forex Market: GBP/USD remains rangebound as weak UK inflation data heightens negative interest rate probability

GBP/USD held steady during late European trade on Wednesday, recouping part of earlier losses, but startling UK inflation data may still weigh on the Sterling, as it supports the prospect of negative interest rates being introduced by Bank of England to prop up the pandemic-ravished economy.

Earlier Wednesday, the Office for National Statistics reported that annual consumer price inflation in the country had decelerated to 0.8% in April, or the lowest level since August 2016 and also considerably below Bank of England’s 2% inflation objective. Analysts on average had expected a slowdown in CPI inflation to 0.9%. Annual inflation was 1.5% in March. At the same time, UK’s annual core consumer price inflation decelerated to 1.4% in April, marking its lowest level since December 2019, from 1.6% in March.

Bank of England representatives, including policy setter Silvana Tenreyro, have already hinted that the central bank could use any policy tool, including negative interest rates, to support economic activity. In this line of thought, it is reasonable to expect negative rates discussion to settle in more insistently at the upcoming policy meeting in June.

As of 11:33 GMT on Wednesday GBP/USD was edging up 0.06% to trade at 1.2258, after touching an intraday low of 1.2222 during the early phase of the European session.

With the UK data string already released and no relevant US macro data scheduled for today, market focus will likely now set on the FOMC Minutes release at 18:00 GMT. The Minutes offer detailed insights on the FOMC’s monetary policy stance. High volatility of the currency pairs containing the US Dollar is usually present after the publication.

The Federal Reserve kept its target range for the federal funds rate intact at 0%-0.25% at its two-day policy meeting concluded on April 29th, while reiterating its commitment to use the entire range of tools to support pandemic-hit economy. The central bank said the scope and eligibility for the Main Street Lending Program would be expanded. A third loan option will be introduced, with increased risk sharing by lenders for borrowers with greater leverage, the minimum loan size for certain loans will be diminished to $500,000, while the pool of businesses eligible to borrow will be expanded.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 21.2 basis points (0.212%) as of 10:15 GMT on Wednesday. It has been the highest spread since March 25th (24.9 basis points).

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2244
R1 – 1.2304
R2 – 1.2357
R3 – 1.2417
R4 – 1.2477

S1 – 1.2192
S2 – 1.2132
S3 – 1.2079
S4 – 1.2027

GBP/USD has formed a relatively tight range during the past 25-30 hours of trade. Immediate support may be expected at the 20-period EMA (1.2250) and then, at today’s low of 1.2222. A break below it may expose the round 1.2200 level and after that, the low from May 19th (1.2184). Resistance may be expected in the area around May 19th high (1.2297).

The larger time frame clearly visualizes that the major pair has been moving within a wide trading range since late March, with the upper limit being around April 14th high of 1.2648 and the lower limit being around May 18th low of 1.2076.