POUND STERLING TALKING POINTS
GBP/USD FUNDAMENTAL BACKDROP
The UK CPI release missed on both headline and core inflation respectively (see economic calendar below) with the largest downward contributor being food while upside influences saw motor fuel leading the way. This is no surprise as global CPI reports are capturing the rally in crude oil prices, leaving central banks wary about future costs.
Although inflationary pressures slightly softened, we saw core inflation at these levels in early 2023 after which prices then pushed higher. Headline readings are promising reaching levels last seen in February 2022 but remain far off from target levels. The slowdown in retail sales will encourage BoE officials in that the tight monetary policy environment seems to be weighing on consumers.
The uptick in PPI however, is a cause for concern as PPI tends to be a leading indicator whereby producer prices often end up being passed on to the consumer thus increasing CPI figures going forward. If energy prices continues to rise, this may well be the case.
Source: DailyFX Economic Calendar
The impact on money market pricing (refer to table below) for the Bank of England (BoE), has changed little post-announcement and remains in favor of a 25bps rate hike with roughly 79% probability tomorrow. I expect no surprises here and forward guidance will be critical to the future interest rate cycle.
BANK OF ENGLAND INTEREST RATE PROBABILITIES
GBP/USD DAILY CHART
Chart prepared by Warren Venketas, IG
Price action on the daily cable chart above shows the pound selling off, heading towards the 1.2308 May swing low. The pair now enters oversold territory as measured by the Relative Strength Index (RSI) but has a lot more volatility in store with the Fed rate announcement later today and the BoE tomorrow.
Key resistance levels:
1.2500200-day MA (blue)
Key support levels:
BEARISH IG CLIENT SENTIMENT
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