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British Pound (GBP) Forecast: Mixed UK Inflation Sees Headline Beat While Core Dips

British Pound (GBP) Forecast: Mixed UK Inflation Sees Headline Beat While Core Dips

Warren Venketas, Analyst

POUND STERLING TALKING POINTS

  • GBP/USD unphased by mixed UK inflation.
  • 50bps almost a certainty in August BoE meet.
  • IG Client Sentiment favors short-term GBP upside.
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GBP/USD FUNDAMENTAL BACKDROP

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The pound was largely unphased by UK inflation data earlier this morning (see economic calendar below). The release had mixed results with headline inflation marginally exceeding expectations due to soaring fuel and food costs while core inflation dipped for the first time since July 2021.

GBP/USD ECONOMIC CALENDAR

uk inflation economic calendar

Source: DailyFX Economic Calendar

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If we look at the UK inflation graphic below, forecasts are expectant of an energy and food price peak around October after which we should see a decline in headline numbers towards the latter part of 2022 and early 2023. This should theoretically decrease hawkish pressure on the Bank of England (BoE) however, these projections are highly dependent on the Russia/Ukraine situation which carries a significant amount of uncertainty.

UK INFLATION BREAKDOWN

UK inflation composition

Source: ING

Currently, money markets are pricing in roughly 50bps or the August interest rate decision with yesterday’s jobs and now today’s elevated inflation augmenting the aggressive bias.

BOE INTEREST RATE PROBABILITIES

BOE rate probabilities

Source: Refinitiv

TECHNICAL ANALYSIS

GBP/USD DAILY CHART

gbp/usd daily chart

Chart prepared by Warren Venketas, IG

Daily GBP/USD price action above has not changed much from yesterday with the 20-day EMA (purple) holding steady as resistance. Bearish momentum continues to slow and a push above the midpoint on the Relative Strength Index (RSI) could bring the 1.2080 (76.4% Fibonacci) into consideration.

Key resistance levels:

  • Trendline resistance (black)
  • 50-day EMA (blue)
  • 1.2080
  • 20-day EMA (purple)

Key support levels:

  • 1.1800

BULLISH IG CLIENT SENTIMENT

IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 72% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however due to recent changes in long and short positions we settle on a short-term upside bias.

Contact and follow Warren on Twitter: @WVenketas

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

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