UK Inflation Surges, GBP/USD Supported

  • GBPUSD
    (${instrument.percentChange}%)

GBP/USD - H4

CPI Inflation surged 5.4% y/y in the UK in December, from 5.1% in the previous month. This is the highest level since the beginning of the National Statistic series in 1997 and was last higher in the historical modelled data series in March 1992, when it stood at 7.1%. [1]

Last month, the Bank of England had surprised many investors by increasing interest rates to 0.25% (from 0.1%) in the face of persistently high inflation, which it sees peaking at 6% in April.

The BoE's next monetary policy decision is expected on February 3rd and today's data support aggressive tightening expectations, with CME's BoE WatchTool projecting another rate hike. [2]

These expectations may be supportive of the Pound, but the Fed has also been aggressively moving towards rate hikes, with markets seeing lift-off in March. Furthermore, the conversation now begins to shift towards, not just how many increases we will get, but of what size. On Monday, high profile investor Bill Ackman called for a 50 bps rate hike. [3]

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Given these competing dynamics, caution is needed around the pair's trajectory.

GBP/USD initially failed to benefit from the higher CPI print, amidst broader risk-aversion, but finds support as sentiment improves during the European session. As long as it trades in positive territory, it has the ability to push towards 1.3690-9, that will bring this year's highs in its crosshairs (1.3749), but we are cautious at this stage.

Its three-day slump however has put it in a precarious position and in risk of further correction towards 1.3524-05, which contains the EMA200 and the 38.2% Fibonacci of the "December Low/January highs" rise, although a catalyst would likely be required for a break below it.

Not much is going on at the rest of the economic calendar today, but Bank of England officials, including Governor Bailey, appear before the UK's Parliament Treasury Select Committee (14:15).


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Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 19 Jan 2022 https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/december2021

2

Retrieved 19 Jan 2022 https://www.cmegroup.com/trading/interest-rates/bank-of-england-watch-tool.html

3

Retrieved 18 May 2022 https://twitter.com/BillAckman/status/1482449528062193671

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