UK Inflation Falls
Bearish sentiment in GBPUSD persists into the middle of the week with the latest UK economic data today giving sellers further ammunition. UK inflation was seen unexpectedly cooling last month with headline CPI dropping to 2.5% YoY from 2.6%, against the unchanged reading the market was looking for. Core CPI was weaker too, falling to 3.2% from 3.5% prior, below the 3.4% the market was looking for. The decline puts an end to two prior, consecutive months of rising inflation and has seen traders lifting their expectations of a February BOE cut. Looking at the breakdown of the data, hotels and restaurants saw the biggest dip in prices, hitting their lowest levels since July 2021. In contrast, housing and utilities prices saw the biggest gains over the month.
Fed/BOE Divergence
Looking ahead today, focus will be on US inflation, the headline economic release this week. Given the dip in UK inflation, and subsequent lift in BOE rate-cut expectations, GBPUSD is vulnerable to a fresh drop today if we see a strong reading in the US. The market is looking for inflation to have risen for the third consecutive month, to 2.9% YoY from 2.7% prior. If CPI is seen at this level or above, this should see traders further pushing out Fed rate cut expectations, leading USD higher. Given the market’s more dovish view on the BOE, this divergence favours a continued push lower in GBPUSD near-term.
Technical Views
GBPUSD
The sell off in GBPUSD has stalled for now into the 1.2067 level. However, with price still in the bear channel and with momentum studies bearish, focus is on a continuation lower while below the 1.2337 level, marking 1.1815 as the next bear target.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.