The UK CPI print came in slightly below forecast, 9% y/y vs 9.1% y/y, but significantly higher than the previous number of 7% y/y. This is the fastest change since 1982. Even when volatile items have been stripped, the core rate is 6.2%, higher than the previous 5.7%. The significant increases in both the headline and core numbers are a concern. The BoE forecasts inflation at 10% toward year-end, coupled with a notable slowdown in economic growth.
Strangely, since the inflation release, the GBPUSD hourly, on the right, has rolled over. The trend-following indicators and the stochastic have crossed bearishly (red ellipses).
This may prove to be significant, given that the daily chart's bounce has cleared the oversold reading in the RSI (green rectangle on the left). I.e., this may be the rally in the downtrend that shorts are targeting, using the inflation release as a catalyst. Given the significant difference between headline and core, the BoE states, "the Bank of England can't do anything about the global supply problems or the energy prices that are currently pushing up inflation" (https://www.bankofengland.co.uk/monetary-policy-report/2022/may-2022).
The BoE acknowledges that rate hikes from its end will hurt the economic slowdown even more. Therefore, there is a dovish feel to any forthcoming BoE action. We will be keeping an eye on the hourly stochastic. If it falls below 20 (blue arrow) and maintains this position, bearish momentum is likely to be building, applying pressure to cable.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.