GBPUSD Drops Toward 1.20

US PPI below forecasts

Heading into today's inflation data, analysts anticipated that PPI would moderately slow in May, going from 11.0 percent yearly to 10.9 percent YoY. However, US Producer Prices actually came in slightly better than expected at +10.8% year over year and +0.8% monthly, marking the 25th consecutive month of rising prices.

Core PPI increased 0.5% MoM (vs +0.6% exp) and +8.3% YoY (vs +8.6% exp), both of which were below forecasts (to the downside). Notably, all of the figures from April were dramatically revised downward.

As investors rushed to price in a higher possibility of a bigger interest rate increase from the Federal Reserve as it races to confront inflation, volatility resurged throughout markets at the start of the week. According to market participants, the Federal Open Market Committee (FOMC) will increase interest rates by 75 basis points this week. 

As per CME Group data from Tuesday morning, traders have priced in this possibility with more than 90% likelihood. A decision and press conference from Federal Reserve Chair Jerome Powell are scheduled for Wednesday as part of the FOMC's two-day policy-setting meeting, which starts on Tuesday.

Downtrend continues

The weekly chart shows that the pair has been in a steep downtrend since January, confirmed by lower lows and highs. The next target could be at the psychological level of 1.20, followed by 2019 lows at 1.1970. If the momentum does not stop there, we will likely see a decline to the COVID lows near 1.15.

Alternatively, the Pound must climb above 1.22 to cancel the immediate bearish momentum. Until then, the outlook seems bleak for sterling bulls.