The GBP/USD exchange rate continued its strong rally on Wednesday after the UK published a hotter-than-expected inflation report and as the market awaited for the upcoming Federal Reserve minutes. So, why is the GBP to USD pair soaring as the UK remains in a stagflation?
GBP/USD rises amid stagflation concerns
The GBP/USD pair rose to 1.2610 even after the latest UK inflation data confirmed that the country was in a stagflation period. Stagflation is defined as a period of high inflation and slow economic growth.
Data by the Office of National Statistics showed that UK inflation ticked upwards in January. The headline CPI moved from 2.5% in December to 3.0%, higher than the median estimate of 2.8%. It moved from 0.3% to minus 0.1% during the month. The core CPI, which excludes the volatile food and energy prices, rose from 3.2% to 3.7%.
These numbers are notable because the UK’s economy is not doing well. The most recent report showed that the economy expanded by just 1.4% in the fourth quarter. It avoided a recession narrowly in 2024.
Stagflation is the toughest thing that a central bank can deal with because of the unintended consequences. An interest rate cut by the central bank to support the economy wil likely lead to more inflation. On the other hand, a rate hike to beat inflation will likely lead to slow growth.
The UK inflation report had some good news beneath the surface. For one, the closely-watched service inflation was lower than expected by both the Bank of England and City analysts. In a note, ING analysts said:
“Falling services inflation wouldn’t necessarily speed up the pace of rate cuts, but it would help cement a total of four cuts this year. We also expect rates to fall to 3.25% in 2026, which is a fair bit lower than markets are currently pricing.”
FOMC minutes ahead
The next key catalyst for the GBP/USD pair will be the upcoming minutes by the Federal Reserve.
Historically, these minutes play an important role in providing more information about the previous Fed meeting. They also help to guide the market on what to expect in the next meetings.
However, there are signs that these minutes will not lead to more market volatility because the January meeting did not catch market participants by surprise. The bank left interest rates unchanged and maintained a more hawkish tone.
Jerome Powell confirmed the hawkish view in his testimony in congress last week. He said that the Fed will hold rates steady in the coming months and only cut when inflation falls.
Odds of inflation falling is limited because Donald Trump has proposed multiple tariffs. His recent proposal is a 25% tariff on imported motor vehicles, a move that will make them more expensive to customers.
GBP/USD technical analysis
GBPUSD chart by TradingView
The daily chart shows that the GBP to USD exchange rate bottomed at 1.2100 earlier this month and has rebounded to 1.2620. It has jumped above the 100-day and 50-day Weighted Moving Averages (WMA).
The GBP/USD pair has moved to the 38.2% Fibonacci Retracement level, a sign that bulls are in control. Oscillators like the Relative Strength Index (RSI) and the MACD indicators have moved upwards.
Therefore, the pair will likely keep rising as buyers target the 50% Fibonacci Retracement level at 1.2772. A drop below the support at 1.2550 will invalidate the bullish view.
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