Pound-Dollar Eyes 1.30 Next But Overbought Warnings Flash, U.S. CPI is Key

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The march higher in the Pound to Dollar exchange rate reaches a key milestone as the 1.30 level comes into view, a target that could be attained if the U.S. reports another large fall in inflation later on Wednesday.

Today's high in Pound-Dollar is located at 1.2969 as Pound Sterling extends its post-jobs report momentum but analysts say the U.S. Dollar side of the equation will be where the action lies over the coming sessions.

"Benign CPI could unlock a leg lower in the dollar," says Chris Turner, Global Head of Markets at ING Bank N.V. "US CPI will determine whether GBP/USD dramatically trades through 1.3000."

The market is looking for a headline reading of 3.1% year-on-year to be reported on release at 13:30 BST with the rule of thumb suggesting a downside miss could result in Dollar weakness and anything above could prompt a rebound that deals a setback to GBPUSD.

"A softer than expected US inflation report today could be the catalyst to drive the pound back above $1.30 for the first time in 318 days," says George Vesssey, FX and Macro Strategist at Convera.

Markets will also be particularly interested in the core component with the y/y rate expected to read at 5.0%, down on 5.3% previously.

An undershoot in inflation would surely unlock this level and a sizeable undershoot is likely to offer a move beyond here: "There is an outside risk to 1.33 should we see a November 22-style move in the dollar," says Turner.

However, Turner says taking out 1.30 "will be tough" for Pound Sterling which is starting to look extended following its recent rally.

"It is probably better to stay cautious here and after a good rally so far this month, 1.30 could be difficult to break," he says.

"Given that such a disinflationary print is expected, any miss to the upside would rattle markets and lead to a sell-off in risk assets," adds Vesssey.

The daily chart for GBPUSD meanwhile hints at overbought levels with the Relative Strength Indicator (RSI) now above 70 (see lower pane in the below):

Above: GBPUSD at daily intervals with RSI shown in lower panel.

The RSI is a momentum indicator and when above 50 serves as confirmation that an exchange rate is subject to positive momentum. But when it moves above 70 it signals overbought conditions.

The RSI tends to ultimately revert into the 30-70 range on any forays outside of these boundaries, but for this to happen the Pound-Dollar exchange rate would need to either enter a phase of consolidation or retreat.

Although the trend remains positive some cooling in the rally is therefore a potential development for the coming days.