• The GBP/USD exchange rate retreated to key support levels on the charts in the last trading session of last week.
• This is after the Fed's favorite US inflation measure rebounded significantly in what might be a harbinger of a renewed recovery in January.
• The sharp losses of the GBP/USD currency pair sterling reached the 1.1928 support level, near its lowest in two months, and closed last week's trading around those losses.

Overall, the dollar was bought across the board on Friday as momentum accelerated after the Bureau of Economic Analysis said that the core US personal consumption expenditures (PCE) price index inflation rate rose 0.6% in January, up from 0.4% previously. The consensus was for the 0.4% reading not to change, but for the price, pressures to strengthen enough to lift annual core personal consumption expenditures inflation to 4.7%, from 4.6% previously, when economists were looking on average a drop to 4.3%.

Commenting on the results, Kathryn Judge, an economist at CIBC Capital Markets, said: "This will add to the concern about the Fed, especially with continued strong demand in the discretionary consumption categories."

More importantly for the US Federal Reserve, the biggest drivers of inflation in January were spending on both non-durable goods and services and their prices – in other words, consumer items – with the non-durable goods component adding the most to the rebound. Accordingly, Chris Eggo, President of AXA IM Investment, says: “Inflation is a symptom of the imbalances resulting from years of monetary largesse and supply and demand disruptions that followed the pandemic and the Russian-Ukrainian war. Inflation since last year has necessitated a paradigm shift.” “As a result, any inflation release that deviates from the ideal path of a quick return to the pre-pandemic utopia of a global rate of 2% means that central bankers become more hawkish and market rates another notch higher in final interest rates.”

Friday's data comes as a disappointment to many in the FOMC who voted to step down in February in the size of the interest rate steps to 0.25% increments and had hoped that the federal funds rate somewhere between 5% and 5.5% would be enough to bid farewell to inflation.  Accordingly, Isabella Rosenberg, a forex analyst at Goldman Sachs, says: “If we take into account stronger inflation and a stronger message from policymakers, they should continue to pressure the dollar upwards.” It adds: “Most of the recent declines in core PCE inflation have been cyclical-driven, while the traditionally cyclical components of core PCE inflation remain elevated with relatively more modest signs of slowing.”

The data disrupts several months of cooling that has been widely viewed and in some cases heralded as the start of a deinflationary process that would quickly return the Fed's preferred measure of inflation to its 2% target.
 

Sterling forecast against the dollar today:

There is no doubt, that the collapse of the price of the GBP/USD pair below the psychological support level of 1.2000 will increase the strength and control of the bears over the trend and warn of a strong downward move coming. The closest support levels for this performance are 1.1880 and 1.1790, among which we can think of buying the currency pair without risk. We are waiting for the moment of correction and rebound to the upside.

On the daily chart, there will be no reversal of the current trend without the bulls moving toward the resistance level of 1.2185 again. The economic calendar is devoid of British economic releases, and the focus will be on the announcement of the US Durable Goods Orders. The sterling/dollar will also be affected by investor sentiment and the performance of global financial markets.

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