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GBPUSD Drops After Inflation Falls to Lowest Level in a Year

GBPUSD Drops After Inflation Falls to Lowest Level in a Year

Justin McQueen, Analyst

GBP News and Talking Points

  • GBPUSD declines after UK inflation surprises to the downside
  • Bank of England market pricing for a hike next month falls to 65% from 80%

See our Q2 GBP forecast to learn what will drive the currency through the quarter.

Surprise Fall in Inflation Reduces BoE Rate Hike Expectations

UK inflation fell 0.2ppts to 2.5% in March, dropping below economist forecasts of 2.7%. In immediate response to the inflation report, the Pound fell sharply to session lows of 1.4200 with falling inflation reducing the necessity for the Bank of England to raise interest rates. Given that next month’s meeting is largely priced in for a rate hike, this report is likely to reduce the need for a second hike later in the year.

The markets are now pricing as much as a 65% chance of 25bps hike in May, down from 80%, while a second hike by the end of the year is priced in around 5% from a previous of circa 40%. Looking ahead focus will be on comments from BoE’s Carney, Cunliffe, Broadbent and Saunders in regards to their views on the most recent economic data on Friday.

PRICE CHART 1: GBPUSD 1-MINUTE TIME FRAME (INTRADAY APRIL 18, 2018)

GBPUSD Drops After Inflation Falls to Lowest Level in a Year

Chart by IG

You can access the latest IG Client Sentiment Report to see how traders are positioned in GBP against a range of currencies to help you shape your trading decisions.

IG Sentiment Suggests a Mixed Outlook for GBPUSD

GBPUSD Drops After Inflation Falls to Lowest Level in a Year

GBPUSD: Data shows 37.9% of traders are net-long with the ratio of traders short to long at 1.64 to 1. In fact, traders have remained net-short since Mar 21 when GBPUSD traded near 1.39422; price has moved 2.3% higher since then. The number of traders net-long is 27.3% higher than yesterday and 5.1% higher from last week, while the number of traders net-short is 9.4% lower than yesterday and 21.1% 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.

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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

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