Two Trades To Watch: GBP/USD, Gold Forecast - Wednesday, May 20

GBP/USD struggles below 1.34 after cooler inflation data

GBP/USD is modestly lower below 1.34 after cooler-than-expected UK inflation data and amid a resilient U.S. dollar.

UK CPI fell to its lowest rate in over a year, to 2.8% year-on-year in April, down from 3.3% in the previous month, amid a more favourable annual comparison and government support with bills. The figure was lower than the 3% forecast despite higher petrol pump prices.

The services sector, considered a key indicator of underlying price pressures, fell to 3.2%, its lowest level since January 2022.

Markets now see less than a 20% chance of a rate hike in June, down from 50% last week. The market is also pricing in 55 basis points of rate hikes this year, down seven basis points from Tuesday's close.

Gilt yields are falling following the data, with the 10-year gilt yield at 5.07%, while the pound is falling versus the euro and the U.S. dollar.

However, this feels like the lull before the storm. Fuel costs surged 23%. This was offset by lower household bills, which transferred the cost of green energy sources to general taxation.

The cooler inflation data comes after weaker UK jobs data yesterday, highlighting the challenges faced by the BOE and tipping the balance towards a July hike rather than a June move.

The softer jobs market could limit the risk of second-round inflation effects, although the central bank cannot afford to be complacent.

Governor Andrew Bailey and three of his colleagues will give the latest assessment of how the conflict in Iran is affecting the economy when they appear before the Treasury Committee later today.

GBP/USD forecast – technical analysis

GBP/USD extended its recovery from the 1.32 support zone into resistance at 1.3650, forming a double-top reversal pattern before breaking lower below trendline support and the 200 SMA. A rebound from 1.3300 stalled at the 200-day moving average near 1.3430, reinforcing the bearish bias.

Momentum indicators remain negative, with the RSI below 50. Sellers will look for a break below the 1.3340–1.3300 zone to expose 1.3200.

On the upside, buyers would need to reclaim the 200-day moving average at 1.3430 to target 1.3535 and potentially 1.3600.

XAU/USD falls to a 7-week low as rate fears rise

Gold is holding steady on Tuesday after falling more than 1.7% in the previous session, extending its decline to a seven-week low.

The precious metal came under pressure as rising oil prices and worries over sticky inflation pushed Treasury yields higher.

The benchmark 10-year Treasury yield is hovering near its highest level in over a year, while the 30-year yield is approaching multi-decade highs. When Treasury yields rise, this increases the opportunity cost of holding non-yielding gold.

Elevated oil prices have stirred inflation fears across the market, raising concerns about higher energy, transport, and production costs, which could ripple through the economy and force central banks to turn hawkish or even start hiking rates.

Attention is turning to the release of the Federal Reserve's April meeting minutes, which could provide more clues over how concerned policymakers are about inflation and whether they are leaning more towards hikes or simply keeping rates higher for longer.

The market is now pricing in around a 55% probability that the Fed will hike rates before the end of the year, up from 35% just a week ago.

There is also pressure from the strong dollar, which makes gold more costly for those buying in foreign currencies. The U.S. dollar is trading at its highest level since early April.

Gold wasn't alone in the sell-off. Silver had an even rougher session, falling 6% on Tuesday to 73.25 and is now down around 20% from last week's highs.

Attention will remain on U.S.-Iran developments, oil prices, and the outlook from the Fed.