Rise of GBPUSD is showing increasing signs of overheating

The GBPUSD currency pair at the start of the new week updated the highs since mid-March, being above the level of 1.278. Quotes have recovered almost all the losses incurred in the first half of spring. However, by the current moment the wave of strengthening of the pound against the dollar already has increasing signs of overheating, according to the technical indicators. The price hasn’t shown a significant correction since the beginning of May, so the scale of the pullback may be quite impressive. The first target of the bears could be the level of 1.271.

The trigger for the last wave of GBPUSD growth was the UK inflation data for April. The rate of price growth slowed to 2.3% from 3.2%, but market participants expected a lower value of 2.1%. Bloomberg economists pushed back their forecasts for the first key rate cut by the Bank of England from June to August, while noting positive aspects. Inflation in almost all categories, except for services, has already reached the target level of 2%. This provides an opportunity to be optimistic about the chances of monetary policy easing during the summer.

This view is supported by today's statistics from the British Retail Consortium (BRC). According to the latest report, in May price growth in UK stores fell from 0.8% to 0.6% and reached its lowest level since November 2021. At the same time, only food products make a positive contribution to inflation, while non-food items are getting cheaper at an accelerating rate (-0.8% this month, compared to -0.6% in April).

Mike Watson, head of retail analysis at NielsenIQ, expects further improvements in consumer prices in the UK. Food inflation is still above normal, but its slowdown to 3.2% from 3.4% gives hope that the current trend of price stabilization will continue.

The RSI indicator on the daily chart of GBPUSD entered the overbought zone for the first time in 2.5 months. In March, this signal preceded a powerful downward movement of quotes, which is still expected by many traders with short positions. The short-term correction target is the level of 1.271.

The following trading strategy can be suggested:

Sell GBPUSD not higher than at the level of 1.28. Take profit — 1.271. Stop loss — 1.283.