Sterling forms hammer pattern as UK inflation soars

The GBP/USD price went sideways after the relatively strong UK consumer inflation data. The pair is trading at 1.2234, where it has been in the past few days. This price is about 2.52% above the lowest level last week.

UK inflation soaring

The Bank of England (BOE) is in a fix as the country moves to a stagflation. Data published on Wednesday showed that the country’s inflation continued soaring in May as the cost of energy and food accelerated.

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According to the Office of National Statistics (ONS), the headline consumer price index (CPI) rose from 9.0% in April to 9.2% in May this year. This increase was in line with what most analysts were expecting.

Excluding the volatile food and energy prices, inflation slipped from 6.2% to 5.9%. On a MoM basis, the country’s headline and core inflation dropped in May. 

Analysts now believe that the headline CPI will continue rising and reach double digits in the coming months. This is in line with the Bank of England guidance that inflation will rise to 11%.

The concern for the BOE is that the recent rate hikes have not helped to slow inflation. The bank has already delivered five 0.25% rate hikes since December.

Another concern is that more rate hikes will not continue dragging the UK economy. Recent data show that many sectors of the economy are struggling. For example, retail sales dropped sharply in April while housing demand has started easing. In a note, analysts at Bloomberg said:

“The BOE opened the door to moving in bigger steps than 25 basis points by saying signs of more persistent inflationary pressure would be met by ‘forceful action.’ Today’s release will do nothing to allay those fears.”

The next key catalyst for the GBP/USD pair will be the upcoming testimony by Jerome Powell, the Federal Reserve chair. In it, he is expected to explain to senators why the country’s inflation has surged and the measures the bank is taking to manage it. Precisely, senators will seek to know how high the Fed is willing to hike interest rates.

GBP/USD forecast

The two-hour chart shows that the GBPUSD price formed a small hammer pattern after the latest UK inflation data. In price action analysis, this pattern is usually a bullish sign. In line with this, the pair has managed to move above the 25-period and 50-period moving averages. 

It remains between the 38.2% and 50% Fibonacci retracement level. Therefore, there is a likelihood that the GBP to USD exchange rate will have a bullish breakout in the coming days.

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