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GBP Slips after UK Inflation Turns Lower

GBP Slips after UK Inflation Turns Lower

2018-01-16 10:30:00
Nick Cawley, Strategist
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Sterling Talking Points

- Inflation turns lower as air fares and recreational goods fall.

- GBPUSD gives back some of its recent gains but remains supported by positive Brexit sentiment.

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UK Inflation Data Falls for the First Time in Six Months

Headline UK inflation rose to 0.4% from 0.3% on a monthly basis as widely expected, but annual inflation fell to a six-month low of 3.0% from 3.1% in November. Core annual UK inflation – headline minus food and energy prices – also fell to 2.5% from 2.7% in November.

Consumer price inflation including owner occupiers’ housing costs (CPIH) also edged lower to 2.7% against expectations and a prior reading of 2.8%.

Commenting on today’s inflation figures, ONS Senior Statistician James Tucker said, “Inflation has been running at roughly the same rate since last spring following significant increases, partly due to the weaker pound after the European referendum. It remains too early to say whether today’s slight fall is the start of any longer-term reduction in the rate of inflation.

Sterling Edges Lower But Support Remains

Sterling edged marginally lower on the inflation release as investors see today’s figures taking the pressure off the Bank of England to raise rates. However the political backdrop is still supportive for the UK currency on talk that a soft Brexit is becoming more likely. Allied to that, UK growth forecasts are being revised up by various investments banks from the IMF’s lowly 1.5% forecast.

GBPUSD Price Chart Five Minute Timeframe (January 16, 2018)

GBP Slips after UK Inflation Turns Lower

Chart by IG

GBPUSD Client Positioning Data Show Conflicting Signals

IG Client Sentiment data show 34.3% of traders are net-long GBPUSD with the ratio of traders short to long at 1.92 to 1. In fact, traders have remained net-short since Dec 28 when GBPUSD traded near 1.33732; price has moved 3.0% higher since then. The number of traders net-long is 12.1% higher than yesterday and 2.4% lower from last week, while the number of traders net-short is 8.1% higher than yesterday and 2.9% higher from last week. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBPUSD trading bias.

The Traits of Successful Traders and how to find the Number One Mistake Traders Make are just two of the topics covered in our Free Trading Guides.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1

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