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GBP/USD Bounces Up to a Lower High Ahead of UK Inflation Data

GBP/USD Bounces Up to a Lower High Ahead of UK Inflation Data

Fundamental Forecast for British Pound:Bearish

Last week, my colleague David Song reiterated our Bearish forecast on the British Pound, citing the dovish tone taken by the Bank of England during Super Thursday and the fact that it looked as though the Sterling was going to continue getting hit by depressed rate expectations moving forward. As a matter of fact, one of the big takeaways from last week’s BoE announcement was that not only that the Bank of England wouldn’t likely be raising rates anytime soon, but that we may even be looking at an extension or increase in QE. The prevailing thought being that the Chief Economist of the Bank of England and voting member on the Monetary Policy Committee (MPC) Andrew Haldane may eventually bring on a three-way-vote. After numerous 8-1 splits on the MPC, with Ian McCafferty being the sole dissenter voting for a rate hike; many started to think that Mr. Haldane may also dissent, but voting for looser monetary policy to split the vote even further 7-1-1.

This sent the Cable flying lower as rate hike bets out of the UK continued to get priced-out of the market, and when t he blowout NFP report last Friday further firmed up rate-hike expectations for the United States, GBP/USD went into full-on lurch mode as we sank an additional 193 pips after the outsized ~200 pip movement from the day before.

Data this week wasn’t very encouraging for the UK. We did see a drop in the unemployment rate, but the disappointing wage growth that accompanied that release speaks to the elephant in the room (continued lackluster inflation). And given the recently downgraded inflation forecasts for the UK that came from the BoE on Super Thursday, this disappointment in wage growth only seemed to exacerbate the problem. Monday and Tuesday saw meager moves higher after the outsized-jumps lower of the week before; but the news that we received on Wednesday was a big motivator across markets, as Mr. Haldane soundly put to rest the idea that he was going to back any further accommodation in the near-future. On Wednesday, Mr. Haldane said that looser policy was not his ‘central view.’ This brought strength into the Sterling against most major currencies, and this strength lasted through Thursday only to see gains cauterized by a Doji candlestick on Friday.

The big item on the docket for next week out of the UK is inflation due out on Tuesday morning. This speaks directly to that pressure point that Mr. Mark Carney has been focusing on throughout the year when discussing that topic of rate hikes. Given the recent scope of UK inflation, it’s hard to hold out hope for much positivity here. We also get retail sales data on Thursday, and this could be telling towards that future inflationary pressure; as retail sales are often a precursor to stronger growth, which leads to higher inflation, lower unemployment, etc.

From a technical perspective, the Sterling is still confined to the down-trending channel against its US counterpart. Today’s Doji formation may be a prelude to an evening star, and should Monday’s candle close below 1.5210, the formation will be complete, and this could be an attractive way to sell the pair.

We continue to reiterate our bearish forecast on the British Pound, under the premise that the dovish stance taken by the BoE on Super Thursday is not likely to recede until data dictates otherwise. And we’re just not there yet.

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