Should you buy sterling after the UK inflation data?

The GBP/USD pair slumped to the lowest level since November 2020 even after the UK published strong consumer and producer inflation data. The pair dropped to a low of 1.2976 as it crossed the key support level at 1.300.

UK inflation soaring

The US published strong inflation data on Tuesday. The numbers showed that the country’s headline consumer inflation rose to 8.5% in March as the cost of energy jumped. This increase was better than what most analysts were expecting.

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The same trend is happening in the UK. According to the Office of National Statistics (ONS), consumer prices rose from 6.2% in February to 7.0% in March. Economists were expecting the data to show that inflation jumped by 6.7%. 

Excluding the volatile food and energy, UK inflation rose by 0.9% and 5.7% on a month-on-month and year-on-year basis, respectively. This increase was better than the median estimate of 0.5% and 4.4%.

While consumers are seeing strong inflationary pressures, companies are doing even worse. The producer price index input rose from 15.1% to 19.2%, while PPI output rose from 10.2% to 11.9%, respectively.

These numbers mean that the Bank of England (BOE) will need to do more in its battle against inflation. Besides, the country’s unemployment rate has also been in a downward trend in the past few months. On Tuesday, data revealed that the unemployment rate fell to 3.8%, which was the lowest level in a few years.

The GBP/USD pair declined after the strong UK inflation data because investors believe that the BOE is in a difficult place. While prices have risen, data published on Monday showed that the economy is slowing down. This means that the UK is going through a period of stagflation.

GBP/USD forecast

In my report on GBP/USD on Tuesday, I warned that the pair would keep falling. The pair has moved below the important support level at 1.300. It has also moved below the 25-day and 50-day moving averages while the MACD is stuck below the neutral level.

Therefore, the pair will likely keep falling as bears target the next key support level at 1.2900. A move above the resistance at 1.3130 will invalidate the bearish view.