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Mean Reversion Could See it Retest 1.2

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The GBP/USD price found a strong resistance level at 1.3140 on Friday. 

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  • Sell the GBP/USD pair and set a take-profit at 1.2950.
  • Add a stop-loss at 1.3150.
  • Timeline: 1-2 days.
  • Buy the GBP/USD pair and set a take-profit at 1.3150.
  • Add a stop-loss at 1.2950.

The GBP/USD exchange rate pulled back even after the US published weak retail sales and industrial production numbers. The pair dropped to 1.3037 ahead of the latest UK consumer and producer inflation data.

The GBP/USD price retreated after the US published another set of weak economic data. According to the Commerce Department, retail sales rosse by 0.2% in June, lower than the median estimate of 0.5%. Sales had increased by 0.5% in the previous month.

Core retail sales, which exclude the volatile food and energy products, rose by 0.2% in June. Additional data revealed that manufacturing production dropped by 0.3% while industrial production fell by 0.5%.

These numbers mean that the American economy is indeed slowing. Data released earlier this month revealed that the labor market softened in June while inflation dropped to the lowest level since March 2021.

Focus now shifts to the upcoming UK inflation numbers scheduled for Wednesday morning. Data published by Kantar on Tuesday showed that food inflation dropped for the fourth straight month in June. Annual inflation stood at 14.9% in June, down from the previous 16.5%.

Economists believe that the country’s inflation remained at an elevated level in June. Those polled by Reuters see inflation rising by 0.4% in June, down from the previous month’s 0.6%. On a YoY basis, they expect that consumer prices dropped from 8.7% to 8.2%.

Core inflation is also expected to remain at an elevated level. Economists see the core CPI to come in at 0.4% (MoM) and 7.15 (YoY). If these economists are accurate, it means that inflation remains sharply above the Bank of England’s target of 2.0%.

The GBP/USD price found a strong resistance level at 1.3140 on Friday. It has now retreated as the US dollar index crawled back. This decline seems like a mean reversion since the pair was sharply higher than the 25-period and 50-period moving averages.

The Relative Strength Index (RSI) has moved from the extreme overbought level of 83 to below the neutral point at 50. The two lines of the MACD have made a bearish crossover pattern. Therefore, the pair will likely continue falling as sellers target the next key support at 1.2845, the highest point in June.

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