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GBP/USD Rebound Vulnerable to Slowing U.K. Consumer Price Index (CPI)

GBP/USD Rebound Vulnerable to Slowing U.K. Consumer Price Index (CPI)

2018-10-16 15:00:00
David Song, Currency Strategist
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British Pound Talking Points

GBP/USD extends the rebound from earlier this week as the U.K. Jobless Claims report revealed an unexpected uptick in wage growth, but another failed attempt to test the September-high (1.3299) may undermine the recent strength in pound-dollar as the exchange rate remains stuck within the previous month’s range.

Image of daily change for major currencies

GBP/USD Rebound Vulnerable to Slowing U.K. Consumer Price Index (CPI)

Image of daily change for gbpusd rate

Fresh updates to the U.K. Consumer Price Index (CPI) may generate headwinds for the British Pound as both the headline and core rate of inflation are expected to slow in September, and a signs of easing price pressures may rattle GBP/USD as it instills a mixed outlook for the economy.

In response, the Bank of England (BoE) may keep the benchmark interest rate on hold at the next quarterly meeting on November 1 as ‘the contribution of external cost pressures, which has accounted for above-target inflation since the beginning of 2017, was projected to ease over the forecast period,’ and Governor Mark Carney & Co. may largely endorse a wait-and-see approach for the remainder of the year as ‘the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

Image of BoE bank rate

Keep in mind, the BoE appears to be on track to further embark on its hiking-cycle as ‘an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon,’ but the uncertainty surrounding the departure from the European Union (EU) may keep the Monetary Policy Committee (MPC) on the sidelines as European Chief Negotiator for BrexitMichel Barnier warns that ‘we need more time to reach a comprehensive agreement and achieve decisive progress.’

With that said, BoE officials may tame bets for another rate-hike in 2018, with the near-term outlook for GBP/USD clouded with mixed signals as the recent appreciation in the exchange rate appears to be spurring a shift in retail interest.

Image of IG client sentiment for gbpusd

The IG Client Sentiment Report continues to show a skew in retail sentiment as 56.2% of traders are still net-long GBP/USD, with the ratio of traders long to short at 1.28 to 1. Keep in mind, traders have remained net-long since September 20 when GBP/USD traded near 1.31450, with price moving 0.5% higher since then.

Nevertheless, a deeper look at the report shows the number of traders net-long is 2.5% lower than yesterday and 13.6% lower from last week, while the number of traders net-short is 18.0% higher than yesterday and 20.1% higher from last week. The sharp pickup in net-short position suggests traders are attempting to fade the rebound in GBP/USD, and a further shift in retail sentiment may offer a contrarian view as the exchange rate continues to track the upward trend carried over from August.

However, recent developments in the Relative Strength Index (RSI) cast a mixed outlook for pound-dollar as the oscillator highlights a different dynamic, with the oscillator failing to retain the bullish formation. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

GBP/USD Daily Chart

Image of gbpusd daily chart
  • The recent series of higher highs & lows keeps the topside targets on the radar, but need a break/close above the 1.3310 (100% expansion) to 1.3370 (78.6% expansion) region to open up the next hurdle around 1.3460 (50% retracement).
  • However, a string of failed attempts to test the September-high (1.3299) may produce range-bound conditions, with a move below 1.3090 (38.2% retracement) raising the risk for a move back towards the Fibonacci overlap around 1.2890 (50% expansion) to 1.2950 (23.6% expansion), which largely lines up with the monthly-low (1.2922).

For more in-depth analysis, check out the Q4 Forecast for the British Pound

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--- Written by David Song, Currency Analyst

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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