GBP/USD – Smart Money Analysis: UK Inflation Fails to Support the Pound

GBP/USD has posted strong gains in recent weeks, which could mark the beginning of a broader bullish trend. However, bullish traders have now paused. The pound's rally was exceptionally rapid, and such moves rarely last for long without a correction. Therefore, I expect a corrective pullback, which has already begun and could last for several weeks.

This week's fundamental backdrop for the pound has been mixed. The labor market data—particularly the unemployment and wage reports—were generally supportive. However, the inflation report disappointed. UK inflation slowed more than traders had expected, which, in my opinion, effectively closes the discussion about further monetary tightening by the Bank of England. Instead, attention may gradually shift toward the possibility of policy easing later this year.

It is worth recalling that Bank of England Governor Andrew Bailey made it clear at the latest policy meeting that the disinflation process is continuing and that inflation could return to the 2% target next year. The closer inflation moves toward that target, the greater the likelihood of an interest rate cut. As a result, the growing dovish sentiment surrounding the Bank of England provides a logical explanation for the pound's current decline, which is being reinforced by an ongoing corrective pullback.

The outlook for the FOMC is far less straightforward. Initially, markets expected U.S. inflation to accelerate unless the Fed tightened monetary policy. Later, concerns over inflation eased as oil prices fell to around $70 per barrel. This week, however, oil has climbed to $94, and the latest escalation in the Middle East, combined with the closure of the Strait of Hormuz, could push prices as high as $120.

If the most pessimistic scenario unfolds, oil could return to the $100–120 level as early as next week. In that case, hopes for slowing inflation in either the United States or the United Kingdom would likely disappear. Conversely, if tensions ease, oil prices could fall back to the $60–70 level, reducing the need for further Fed tightening. For that reason, the U.S. dollar cannot currently rely on the Federal Reserve's hawkish stance for sustained support.

From a technical perspective, the chart continues to favor the bulls. The pair first swept liquidity below the April 6 low and later below the March 31 low, providing a solid foundation for the pound's rally in recent weeks. Given that the U.S. dollar still lacks compelling long-term bullish drivers—and has already posted substantial gains in 2026—I believe the bears are unlikely to maintain control for much longer.

Price reacted twice to Bullish Imbalance 23, giving traders profitable long opportunities. At present, however, no new technical patterns have emerged, leaving no clear areas of interest for either long or short positions.

Wednesday's economic calendar was relatively light. The only notable release in the UK was the inflation report, which came in weaker than expected. This miss could continue to weigh on the pound, although the current corrective pullback may already be approaching its conclusion. Unfortunately, there are no actionable chart patterns at the moment. Traders will have to wait for new setups to develop or for liquidity to be swept from key swing levels.

From a broader perspective, I still see little reason to expect anything other than long-term weakness in the U.S. dollar. Neither the conflict between Iran and the United States nor the possibility of Fed rate hikes in 2026 has fundamentally altered that view. Geopolitical tensions temporarily reminded investors of the dollar's safe-haven status, but the conflict has already passed its most intense phase.

Although the Federal Reserve plans to raise interest rates in 2026—a supportive factor for the dollar—it is important to remember that tighter monetary policy will likely slow both economic growth and the labor market. In addition, Kevin Warsh was appointed by President Donald Trump to lead the FOMC with the goal of eventually easing monetary policy, something Jerome Powell was unwilling to do. Therefore, in my view, any appreciation of the U.S. dollar is likely to be temporary rather than the beginning of a sustained long-term trend.

The July 23 economic calendar contains only one event, and it is unlikely to influence trader sentiment. As a result, Thursday's economic backdrop is expected to have little or no impact on the market.

The long-term outlook for the pound remains bullish. Following liquidity sweeps below the two most recent swing lows, the bulls regained control of the market. The pound could still resume its decline toward the bullish trend invalidation level at 1.3007, but that would require new bearish signals, which are currently absent.

The bullish case is supported by the two liquidity sweeps and Bullish Imbalance 23. Although the bullish reaction from that imbalance has already played out and the market has entered a corrective phase, the longer-term upside targets remain the May 1 high at 1.3656 and the January 27 high at 1.3867. However, opening new long positions at this stage would require new bullish patterns, and none have formed yet.