GBP/USD slumps below 1.2600 as US CPI climbs above forecasts

• US inflation at 3.1% YoY, Core CPI at 3.9%, suggests enduring inflation, impacting rate cut outlook.
• Rising US Treasury yields and a stronger Dollar Index reflect market reevaluation of Fed rate strategies.
• CME FedWatch Tool shows decreased expectations for a Fed rate cut in May.

The GBP/USD plunges below 1.2600 as strong economic data from the United States (US) suggests the Federal Reserve (Fed) would keep interest rates higher for longer. At the time of writing, the pair trades at 1.2598 after hitting a daily high of 1.2683.

GBP/USD slid on hot US CPI data, traders await UK inflation figures

The US Bureau of Labor Statistics (BLS) indicated that inflation in January slightly exceeded forecasts, surprising traders. The Consumer Price Index (CPI) for January was reported at 3.1% year-over-year (YoY), which, although lower than December's figures, was above the anticipated 2.9%. The Core CPI, which excludes volatile food and energy prices, remained steady at 3.9%, surpassing the expected decrease to 3.7% on an annual basis.

After the data, US Treasury bond yields edged up, dragging the US Dollar Index (DXY) to a three-month high of 104.87, shy of cracking the 105.00 figure. Expectations for the Federal Reserve’s first-rate cut were pushed until June, as the CME FedWatch Tool showed, as May odds were cut from 52.2% a day ago to 36.4%.

In the meantime, UK jobs data showed that wage growth slowed again, while vacancies fell for the 19th straight report, dropping by 26K from the August-to-October period. Traders will be looking for UK inflation data revealed on Wednesday, with headline and CPI expected to rise from 4% to 4.2% and from 5.1% to 5.2%.

GBP/USD Price Analysis: Technical outlook

The pair dropped to a three-day low of 1.2575 before resuming to the upside, but the bias remains neutral. Although the GBP/USD remains above the 200-day moving average (DMA), a daily close below 1.2600 could open the door to testing the latter at around 1.2562, which could open the door to challenge the 1.2500 figure. A break below will expose the 100-DMA at 1.2484. On the flip side, if buyers regain the 50-DMA at 1.2671, that could pave the way for challenging 1.2700.