Introduction
Inflation is one of the critical economic indicators that affect the financial markets globally. Investors closely monitor inflation data to make informed decisions on investment strategies, especially in the forex market. The GBP/USD currency pair has experienced a bullish trend in 2023, recording over 10% increase since the beginning of the year. However, ahead of the US inflation data for April due to be released this week, investors are anxiously waiting to see if the bullish trend will continue. In this article, we shall consider the chances available for GBP/USD to continue with its bullish trend or whether a reversal is more likely to occur. This will largely benefit investors seeking to trade this pair using any of the best GBP/USD brokers.
The Current State of Inflation in the US today
The inflation rate in the US has been on a downward trajectory for nine consecutive months, recording 5% in March 2023, which was the lowest level since May 2021. This marks a significant decline from the 6% inflation rate recorded in February. However, investors are eagerly awaiting the outcome of the inflation data for April 2023 to determine the next direction of the US dollar in the forex market in May. The forecast for the inflation rate is 5%. Any reading above it would suggest that inflation has not yet been contained despite the Fed’s prolonged series of interest rate hikes up to May 2023.
The Federal Reserve increased its key interest rate by 25 basis points during its session last week, marking the tenth consecutive interest rate hike in fourteen months. This has brought the current Fed’s fund rate to 5.25% in May, which is the highest level since September 2007. The Fed has hinted that this might be the last round of the protracted rate hiking cycle, and the subsequent outcome of the inflation data in the coming months will be crucial in determining this.
Speaking on this, the Fed Chairman, Jerome Powell stated, “We’re no longer saying that we anticipate additional interest rate increases. However, we’ll be driven by incoming data.”
Here, the Fed avoided making a final statement on whether the cycle of interest rate hike has now come to an end.
Impact of Inflation on the GBP/USD Currency Pair:
Inflation is a key driver of currency movements in the forex market, and the GBP/USD currency pair is not an exception. If the US inflation data for April comes out higher than the forecasted 5%, it could trigger a bullish movement in the US dollar and a bearish trend in the GBP/USD currency pair. This is because the Fed will be expected to take an aggressive step to keep the rate in line with their target.
On the other hand, a lower reading from the inflation data below the forecast will favor other currency pairs outside the US dollar, as the latter will become less attractive to investors given the Fed’s resolution to discontinue the interest rate hikes if the inflation data remains lower. In this case, we can expect a more bullish trend for GBP/USD.
Conclusion
The US inflation data for April due to be released this week is eagerly anticipated by investors globally. The current forecast for the inflation rate is 5%, which is expected to continue the downward trend. However, any reading above this could trigger a bullish movement in the US dollar and a bearish trend in the GBP/USD currency pair.
Investors should keep a close eye on the Federal Reserve’s response to the inflation data and the Bank of England’s interest rate decisions as they will be crucial in determining the direction of the currency pair.
