This week our currency strategists focused on the U.S. CPI Report (January 2025) for potential high-quality setups in U.S. dollar pairs.
Out of the four scenario/price outlook discussions this week, one discussion arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay.
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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GBP/USD: Tuesday – February 11, 2025
GBP/USD 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the U.S. CPI report and its potential impact on the dollar. Based on our Event Guide, expectations were for headline CPI to rise 0.2% m/m (vs. 0.4% previous) and core CPI to increase 0.3% m/m (vs. 0.2% previous). The annual headline rate was forecast to hold steady at 2.9%.
With those expectations in mind, here’s what we were thinking:
The “Dollar Dominance” Scenario:
If CPI came in hotter than expected, we anticipated this could dampen Fed rate cut expectations. We focused on USD/CHF for potential long strategies if risk sentiment was positive, particularly given the SNB’s recent openness to negative interest rates if needed. In a risk-off environment, NZD/USD short made sense given the Kiwi’s risk-on characteristics and a recent failure to break above range highs.
The “Dollar Descent” Scenario:
If inflation data showed significant cooling, aligning with recent PPI trends, we thought this could fuel Fed rate cut expectations. We considered GBP/USD for potential long strategies in a risk-on environment, especially given the bounce in 2025 and its relatively high interest rate compared to the rest of the majors. If risk sentiment leaned negative, USD/JPY shorts looked promising given JPY’s safe haven status and the BOJ’s less dovish stance in 2025 so far.
What Actually Happened:
The January CPI report showed mixed but generally hotter-than-expected results:
- Headline CPI rose 0.5% m/m (vs. 0.3% forecast)
- Core CPI increased 0.4% m/m (vs. 0.3% forecast
- Annual headline CPI climbed to 3.0% y/y (vs. 2.9% forecast)
These results were hot, but market rhetoric was quick to play off the numbers given that January’s reads tend to be hotter as activity picks up from the holiday season.
Not too long after the CPI event, Fed Chair Powell testified about the Semi-Annual Monetary Policy Report before the House Financial Services Committee, which seems to have been a market mover and should be considered when developing a bias on the Greenback on the session. Some of the main takeaways were:
- Fed Chair Powell emphasized they’re not in a hurry to adjust policy
- Powell reiterated they’re watching core PCE more closely
Market Reaction:
Given that the market quickly swapped biases back to bearish on USD despite the hot CPI read, and Powell’s tempered comments on interest rate expectations, we thought a bearish dollar bias was appropriate. And with the markets swinging from net negative broad sentiment from earlier in the week towards positive as tariff fears ebbed, we thought our GBP/USD watch post had the best odds of a potential positive outcome.
Looking at the GBP/USD chart, we saw initial selling pressure after the hotter CPI print, with the pair dropping from around 1.2450 to test the pivot point (1.2396). However, the bearish momentum was short-lived as traders seemed to look past the headline numbers.
The pair found strong support at the pivot point level, which coincided with the 20-period moving average. Powell’s subsequent dovish remarks during his Congressional testimony helped fuel a rally, pushing GBP/USD through the R1 (1.2544) resistance level.
Sterling’s advance was further supported by positive U.K. data, including better-than-expected December GDP (0.4% m/m vs 0.1% forecast) and industrial production figures (0.5% m/m vs 0.2% forecast). By Friday’s close, weaker U.S. retail sales data (-0.9% vs 0.0% forecast) had helped drive GBP/USD to test the rising ‘highs’ pattern, where the rally was halted ahead of the weekend.
The Verdict:
So, how’d we do? In our opinion, we thought our original discussion was “highly likely” supportive of a net positive outcome. While the initial fundamental trigger (hot CPI) supported USD strength, the market generally dismissed it due to seasonality and switched focus quickly to Powell’s testimony, which was arguably neutral rhetoric. Gotta adapt to what the market gives ya, right?
For traders who waited for confirmation of support at the pivot point level after the CPI-induced dip, they could have captured a substantial move higher as both fundamental catalysts (Fed speak, weak U.S. data) and technical factors (moving average support, pivot point levels) aligned well and resulted in bullish momentum.
For those who were a bit late to the party and waited for a break of 1.2450 resistance to express a long bias, they still likely had a positive outcome given the bearish sentiment on the Greenback at the end of the week.