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GBPUSD Rebound Vulnerable to Slowing UK Consumer Price Index (CPI)

GBPUSD Rebound Vulnerable to Slowing UK Consumer Price Index (CPI)

David Song, Strategist

Trading the News: UK Consumer Price Index (CPI)

Fresh updates to the UK Consumer Price Index (CPI) may rattle the recent rebound in GBPUSD as the headline reading for inflation is expected to narrow to 1.9% from 2.1% per annum in July.

Image of DailyFX economic calendar

At the same time, the core reading for inflation is anticipated to slip to 1.8% from 1.9% during the same period, and signs of slowing price growth may drag on the British Pound as it puts pressure on the Bank of England (BoE) to insulate the UK economy.

In turn, the Monetary Policy Committee (MPC) may adopt a more cautious tone at the next meeting on October 19, and Governor Mark Carney show a greater willingness to switch gears in 2019 as “underlying growth appears to have slowed since 2018 to a rate below potential.”

However, another unexpected pickup in the UK CPI may trigger a bullish reaction in GBPUSD as it encourages the BoE to retain the current policy throughout the remainder of the year.

Impact that the UK CPI report had on GBP/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL

2019

08/14/2019 08:30:00 GMT

1.9%

2.1%

+28

-5

July 2019UK Consumer Price Index (CPI)

GBP/USD 5-Minute Chart

Image of gbpusd 5-minute chart

Source: Trading View

The UK Consumer Price Index (CPI) unexpectedly climbed to 2.1% from 2.0% per annum in June, with the core rate of inflation highlighting a similar dynamic as the reading increased to 1.9% from 1.8% during the same period.

A deeper look at the report showed the cost for recreation items increasing 1.1% in July to lead the advance, with prices at restaurants and hotels climbing 0.8%, while prices for clothing and footwear slipped 2.9% after contracting 1.0% the month prior.

The stronger-than-expected CPI print is likely to keep the Bank of England (BoE) on the sidelines as the UK prepares to depart from the European Union (EU), and the central bank appears to be in no rush to alter the forward guidance for monetary policy as Governor Mark Carney and Co. insist that “the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

The British Pound edged higher following the CPI report, with GBPUSD climbing to a session high of 1.2100, but the reaction was short lived as the exchange rate closed the day at 1.2053. Learn more with the DailyFX Advanced Guide for Trading the News.

GBP/USD Rate Daily Chart

Image of gbpusd daily chart

Source: Trading View

  • The broader outlook for GBPUSD is no longer constructive as the exchange rate snaps the upward trend from late last year after failing to close above the Fibonacci overlap around 1.3310 (100% expansion) to 1.3370 (78.6% expansion).
  • Nevertheless, the failed attempt to break/close below the Fibonacci overlap around 1.1890 (61.8% expansion) to 1.1950 (78.6% expansion) has pushed GBPUSD out of the bearish trend carried over from May, with the break/close above the former-support zone around 1.2370 (50% expansion) to 1.2440 (50% expansion) to open up the next topside hurdle around 1.2630 (38.2% expansion) to 1.2640 (38.2% expansion).

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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