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Sterling Bucks USD Strength; U.K. Inflation to Approach BoE Target

Sterling Bucks USD Strength; U.K. Inflation to Approach BoE Target

David Song, Strategist

Talking Points:

- Sterling Bucks USD Strength; U.K. Inflation to Approach BoE Target.

- AUD/USD Fails to Break Monthly Opening Range; RSI Points to Exhaustion.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.2509

1.2539

1.2456

25

83

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • The British Pound outperforms its major counterparts, with market attention turning to the U.K. Consumer Price Index (CPI) especially as the headline and core rate of inflation are projected to increases at the fastest pace since 2014; with price growth approaching the Bank of England’s (BoE) 2% target, GBP/USD may work its way back towards the monthly opening range as the pair largely holds above the former resistance-zone around 1.2460 (61.8% expansion) to 1.2490 (38.2% retracement), while the Relative Strength Index (RSI) preserves the bullish formation carried over from October.
  • Signs of stronger-than-expected inflation may push the BoE to further change its tune for monetary policy as officials persistently warn ‘there are limits to the extent that above-target inflation can be tolerated,’ and the slew of key data prints scheduled throughout the second full-week of February may keep the British Pound afloat as the U.K. Average Weekly Earnings are projected to increase an annualized 2.8% in December, while Retail Sales are expected to rebound 0.7% in January.
  • The broader outlook for sterling remains tilted to the downside as the U.K.’s departure from the European Union (EU) clouds the outlook for growth and inflation, but the pound-dollar exchange rate may continue to track the late-2016 range over the near-term as the BoE shows a greater willingness to gradually move away from its easing-cycle, with the first topside hurdle coming in around 1.2630 (23.6% retracement) to 1.2680 (50% retracement) followed by 1.2860 (61.8% retracement).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

AUD/USD

0.7643

0.7686

0.7631

37

55

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using Trading View

  • AUD/USD may be following a similar pattern in late-January as it appears to be carving another bull-flag formation, but the RSI highlights a mixed signal as it deviates from price and fails to preserve the upward trend from the end of 2016; lack of momentum to push into overbought territory raises the risk for a near-term exhaustion especially as the aussie-dollar struggles to break the monthly opening range.
  • Even though Australia Employment is projected to increase another 10.0K in January, it seems as though the Reserve Bank of Australia (RBA) is in no rush to remove the accommodative policy stance as ‘continuing subdued growth in labour costs means that inflation is expected to remain low for some time, and Governor Philip Lowe may keep the door open to further support the real economy as ‘the rise in underlying inflation expected to be a bit more gradual.
  • At the same time, the Humphrey-Hawkins testimony with Fed Chair Janet Yellen may keep the broader outlook for AUD/USD tilted to the downside as Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy over the coming months, with as Fed Fund Futures still pricing a greater than 60% probability for a June rate-hike; nevertheless, the central bank head may refrain from revealing anything new especially in front of lawmakers as the committee remains ‘data dependent.
  • Failed attempts to break the February high (0.7695) may spur a larger decline over the coming days, with a break/close below 0.7590 (100% expansion) to 0.7600 (23.6% retracement) opening up the next downside region of interest around 0.7500 (50% retracement) to 0.7530 (38.2% expansion).

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Read More:

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Gold Prices Vulnerable into February Open- Outlook Constructive Above 1200

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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

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