The British pound received support this morning after a mixed bag of inflation data. Headline inflation in the UK declined in line with expectations to 10.5% (see economic calendar below) while beat estimates likely due to labor shortages. The core read which excludes food and energy from the calculation highlights the tight labor market conditions seen in yesterday’s UK employment numbers while the recent drop in the price of energy has contributed to the decline in the headline figure. In addition, as cited in the ONS report, the primary headline deflationary sectors were “transport (particularly motor fuels), clothing and footwear, and recreation and culture, with rising prices in restaurants and hotels, and food and non-alcoholic beverages.” Many expected a sharp drop in inflationary pressures including the Bank of England’s (BoE) Governor Andrew Bailey which leaves the UK diverging from inflation trends seen in the U.S. which could give GBP additional sustenance against the USD. That being said, the Christmas period could have subsidized much of the upside in the numbers which makes next month’s release a focal point.
ECONOMIC CALENDAR
From an interest rate perspective (see table below), money markets are in favor of a 50bps (42bps at present) increment in the February meeting with a high degree of certainty. With no high impact data scheduled before the meeting, there is little on the way of shifting the needle lower, leaving the half a basis point raise an almost certainty. The BoE will need to take into account recessionary fears for this meeting and could be a factor that keeps the 25bps option on the table.
BANK OF ENGLAND INTEREST RATE PROBABILITIES
TECHNICAL ANALYSIS
Chart prepared by Warren Venketas, IG
The daily GBP/USD chart has followed through on the promise of the golden cross formation (50-day SMA crosses above 200-day SMA) (green) post-CPI, now looking to run up towards the June 2022 swing high at 1.2407; a level that saw resistance back in mid-December.
While the Relative Strength Index (RSI) shows signs of bearish/negative divergence, there is still room for additional pound strength before a possible pullback lower.
Key resistance levels:
- 1.2500
- 1.2407
Key support levels:
- 1.2154
- 1.2100
BULLISH IG CLIENT SENTIMENT
IG Client Sentiment Data (IGCS) shows retail traders are currently SHORT on GBP/USD, with 58% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term upside bias.
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