Fundamental analysis of GBP/USD

This Tuesday, the GBP/USD pair strengthened significantly on the back of the publication of strong UK labor market data.

In addition the British economy created 250 thousand new jobs in April, which was better than the forecasted 100 thousand. Also the unemployment rate in April decreased to 3,8 while analysts forecasted the growth from 3,9 to 4,0%. Undoubtedly the unexpectedly strong statistics has supported the pair in the first half of the day, however the main focus is likely to be on the wages growth. The Bank of England continues to pursue its inflation target. Given the importance of wages, a larger increase of 6.5% may force the Bank of England to implement a tighter monetary policy at the next meeting of the British regulator.

A "hawkish" Bank of England also increases the likelihood of a UK recession. The economy has so far been successful in dealing with the Bank of England's response to higher inflation. However, sentiment could turn murkier if MPC members start talking about more decisive action on the inflation target.

However, investors should also consider the views of the Bank of England. Bank of England Governor Andrew Bailey will be speaking at the Lords Economic Affairs Committee hearing today.

U.S. Session.

The U.S. session will focus on the U.S. consumer inflation report.

The U.S. consumer inflation report will be the main event of the day. The better-than-expected U.S. inflation figures may tip the scales in favor of the dollar.

Economists forecast a decline in annual U.S. inflation from 4.9% to 4.1%, which will support the Federal Reserve's (Fed) decision Wednesday to hold off on raising rates.

The probability of a rate hike in June fell from 29.9% to 18.5% this morning, according to the CME FedWatch tool. However, the probability of a 25 basis point Fed rate hike in July increased from 52.8% to 59.1%. The odds of a 50 basis point interest rate hike in July fell significantly, from 17.1% to 11.9%.

Trading scenarios:

Support levels: 1.23100, 1.23475, 1.23975, 1.24290, 1.24800, 1.25200, 1.25445

Resistance levels: 1.25710, 1.26220, 1.26630.

Main scenario: Buy

Main scenario: GBP/USD is currently trading around 1.25720, which is close to the resistance level of 1.25710. If this level is overcome, the next target level will be 1.26220. In this case, it is recommended to open a buy position with a target at 1.26220 (take profit) and a stop loss level at 1.25445 (stop loss).

Alternative scenario: Sell

If the pair fails to overcome the resistance level of 1.25700 and starts the downside movement, short positions should be opened below the level of 1.25450, with the target of 1.24750 (take profit) and the level of loss limitation at 1.25720 (stop loss).