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A Real Bummer for GBP/USD Bulls

A Real Bummer for GBP/USD Bulls

Boris Schlossberg, Technical Strategist

Muted UK inflation readings give the Bank of England no incentive to tighten its easy monetary policies, and as a result, GBPUSD retreated towards 1.59 rather than running towards 1.60.

UK inflation turned tame in August, sending the British pound (GBP) a bit lower in morning London trade as the Bank of England (BoE) faced no price pressures to change its dovish stance for now. UK consumer prices continued their slow but steady decline, coming in at 2.7% versus 2.8% the month prior, but it was the core reading and the PPI input numbers that showed the true trend in pricing. PPI input printed at -0.2% versus 0.3% expected, while the core CPI reading matched last month's 2.0% rate.

After a protracted bout of persistently high inflation, the UK economy appears to have finally obtained some control over the pricing pressures, as the core reading has remained at 2.0% for three of the past five months. Meanwhile, headline numbers have hovered between 2.5% and 2.7% for most of this year after peaking at 5.2% in 2011.

The decline in prices was a disappointment for GBPUSD bulls, as it offers ample scope for the BoE to maintain its highly accommodative bias despite clear improvements in UK economic growth. The central bank has pursued an aggressive forward guidance policy that is likely to keep UK rates low for the foreseeable future. With inflation data muted, the BoE has no reason to adjust its policy for now.

Cable drifted towards the 1.5900 level in reaction to the news and may see some further declines as the day progresses, but the market’s primary focus will turn to the Federal Open Market Committee (FOMC) policy announcement tomorrow, and the pair could still make a run towards 1.6000 if the Fed does not begin tapering asset purchases.

RBA Minutes Deliver a Dovish Surprise

Elsewhere, the Australian dollar (AUD) also came under pressure in early-Asian trade after the latest Reserve Bank of Australia (RBA) meeting minutes revealed a slightly more dovish bias. The RBA noted that "Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them."

This was still interpreted by some as a dovish stance rather than a neutral one, and AUDUSD pushed below .9300 in the aftermath of the report. As the Asian session progressed, however, the pair inched its way back and was trading above .9350 in mid-morning European dealing.

EUR/USD May Drift Cautiously Higher

In Europe, the German ZEW survey of investor confidence printed much better than forecast, coming in at 49.6 versus 45.3 expected. This was the best reading since March and was driven primarily by good GDP data. However, the most recent Eurozone economic data has missed its mark, which may signal that the nascent recovery is facing some headwinds.

EURUSD rebounded to a high of 1.3370, but the pair stalled at those levels and will likely wait until the US session for further directional cues.

With the FOMC policy decision looming tomorrow, today’s North America trade is likely to be constrained as markets gear up for the main event risk this month. Recent US economic data has been soft, and today's NAHB index may be no exception, as higher rates could have slowed the demand for housing. With the US dollar (USD) still on its heels, that could push EURUSD towards 1.3400 as the day unfolds.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.