Pound Sterling Rebounds: GBP/USD Rises as US Dollar Rally Stalls Despite Hot Core PCE Inflation

The British Pound staged a modest recovery against the US Dollar on Friday, with GBP/USD bouncing off intraday lows as the greenback’s rally lost steam. The move came despite a hotter-than-expected reading of the US Core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation gauge, which initially fueled expectations of a more hawkish policy stance.

Core PCE Data Surprises to the Upside

The US Bureau of Economic Analysis reported that the Core PCE Price Index rose 0.4% month-over-month in January, exceeding the consensus forecast of 0.3%. On an annual basis, Core PCE held steady at 2.8%, above the Fed’s 2% target. The data reinforced the narrative that inflation remains stubborn, complicating the central bank’s timeline for potential rate cuts.

Market participants initially reacted by pushing the US Dollar higher, as higher inflation typically supports a tighter monetary policy outlook. However, the rally proved short-lived. Analysts suggest that profit-taking and positioning adjustments ahead of the weekend may have contributed to the dollar’s pullback, allowing the Pound to regain some ground.

GBP/USD Technical Outlook: Key Levels in Focus

From a technical perspective, GBP/USD found support near the 1.2600 handle, a level that has acted as a pivot point in recent weeks. The pair rebounded to trade around 1.2650 by the afternoon session. Resistance is seen at the 1.2700 zone, followed by the 50-day moving average near 1.2750. A sustained break above this level could open the door for a test of the 1.2800 region.

On the downside, a failure to hold above 1.2600 could expose the pair to the 1.2550 support level, with further declines potentially targeting the 200-day moving average around 1.2450.

What This Means for Traders and Investors

The Pound’s resilience in the face of a hot US inflation print highlights the complex interplay of factors driving the currency market. While the Federal Reserve remains data-dependent, the market has already priced in a significant portion of hawkish expectations. This leaves the dollar vulnerable to profit-taking on any further upside surprises.

For the Pound, the focus now shifts to domestic economic data, including UK GDP revisions and the Bank of England’s next policy decision. The BoE has maintained a cautious tone, balancing persistent inflation concerns against a weakening growth outlook. Any divergence in policy paths between the Fed and the BoE could drive the next major move in GBP/USD.

Conclusion

The GBP/USD rebound following the Core PCE release underscores the market’s tendency to fade initial dollar strength after significant data prints. While the inflation data supports a hawkish Fed, the lack of follow-through buying suggests that the dollar’s upside may be limited in the near term. Traders will watch for further catalysts, including US ISM manufacturing data and UK services PMI figures, to gauge the next directional move.

FAQs

Q1: What is the Core PCE Price Index and why does it matter for GBP/USD?
The Core PCE Price Index measures the change in the price of goods and services purchased by consumers, excluding food and energy. It is the Federal Reserve’s preferred inflation gauge. A higher reading suggests the Fed may keep interest rates higher for longer, which typically strengthens the US Dollar and weighs on GBP/USD.

Q2: Why did the US Dollar rally fade despite a hot Core PCE print?
The initial dollar rally was likely driven by short-term speculative positioning. However, the move faded as traders took profits and reassessed the outlook. The market may have already priced in a hawkish Fed stance, leaving the dollar vulnerable to a pullback after the initial reaction.

Q3: What are the key technical levels to watch for GBP/USD?
Key support is at 1.2600, with a break below opening the door to 1.2550 and 1.2450. Resistance is at 1.2700, followed by the 50-day moving average near 1.2750. A sustained move above 1.2750 could target the 1.2800 region.