GBP/USD upside could be limited by softer inflation data and increased US dollar demand

 GBP/USD upside could be limited by softer inflation data and increased US dollar demand

GBP/USD upside could be limited by softer inflation data and increased US dollar demand.

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GBP/USD was holding steady near six-week highs in early Thursday trading. At the time of writing (09:20 am) it was trading at levels around 1.3800. Meanwhile, the U.S dollar index has been trading flat against a basket of currencies. However, there are some reasons to believe that the upside potential of GBP/USD could be limited by a range of factors.

Inflation data from the ONS came in softer than expected. CPI rose by 0.3% MOM in September compared to expectations of a 0.4% rise. This has dampened expectations for a November rate hike from the Bank of England. There are also concerns over rising Covid-19 cases with the UK having significantly more daily cases than most major European countries. Vaccinations have also been slowing down with many still waiting to receive booster jabs. A significant rise in hospitalisations could weigh on the pound. Politicians have ruled out further lockdowns but there may be a return to mask wearing and other measures if cases continue to rise uncontrollably.

Meanwhile, analysts trading cable will be looking ahead to some key data releases later today from the US. This includes existing homes sales data and initial jobless claims. Weekly claims are expected to hold below 300,000 as the labour market continues to edge toward pre-pandemic levels. However, there is still a way to go before the market returns to pre-virus conditions.

Inflation in the US shows little signs of slowing which could cap potential gains of the pound against the dollar. 1.3850 could be a point of a major upward resistance with downside targets starting at 1.3700. Risk sentiment will also play a key role in demand for the ‘safe haven’ dollar while persistent supply chain problems could cap the demand for riskier assets such as the pound.

On Thursday 21st October:

  • GBP/USD was steady at 1.3800
  • EUR/GBP recovered from multi-month lows to trade above 0.8400
  • GBP/AUD remained subdued at levels just above 1.8400
  • GBP/JPY was defending the 157.00 level after attempting to surpass 5-year highs

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