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Sterling (GBP) Outlook: Weaker-Than-Expected UK Inflation Data Hits GBP/USD

Sterling (GBP) Outlook: Weaker-Than-Expected UK Inflation Data Hits GBP/USD

Nick Cawley, Strategist

Sterling (GBP) Price, Chart and Analysis:

  • December UK inflation falls, adding pressure for further rate cuts.
  • BoE MPC member Saunders remains dovish
  • Sterling (GBP) slips below 1.3000 against the US dollar post-CPI release.

British Pound Rattled as Inflation Hits a Three-Year Low

UK price pressures y-o-yeased in December to 1.3% from a prior month’s print of 1.5%, while the core reading fell to 1.4% from 1.7% in November, with both releases missing market expectations by 0.2%. Monthly inflation was flat in December from a prior reading, and expectations, of 0.2%. According to ONS head of inflation Mike Hardie, inflation eased in December as hotel prices dropped, while women’s clothing costs also fell due to more items being discounted. Expectations for a 0.25% interest rate cut at the end of January BoE meeting rose to 60% post-release and add credibility to a near-term interest rate cut.

A scheduled speech earlier today by external MPC member Michael Saunders had little effect on Sterling in the run-up to the inflation release. Saunders, a known BoE dove, reiterated his view that UK growth remains weak and that additional monetary policy may be required unless data improves in the near-term. Saunders said that against the current weak economic backdrop that, ‘it probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation target. With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present’.

Risk Management in a sluggish economy – Michael Saunders

For all market moving data releases and events, please see the DailyFX Calendar.

GBP/USD Currently Stuck in a Rut

GBP/USD shed around 20 pips after the inflation release and trades back below 1.3000. The pair have traded in a relatively tight range so far this week with the downside seemingly limited around 1.2950 while resistance appears around 1.3050. The bears continue to argue that a rate cut is imminent while the bulls argue that current data releases do not yet show any potential General Election ‘bounce’. The daily GBP/USD chart shows both the 20- and 50-dma blocking upside progress, while any sell-off will encounter support from a cluster of old highs and lows all the way down to just under 1.2800.

GBP/USD Daily Price Chart (May 2019 – January 15, 2020)

GBPUSD daily price chart

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on Sterling (GBP) – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.

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