GBP/USD Signals Bearish Continuation after Soft Inflation Data

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GBP/USD Signals Bearish Continuation after Soft Inflation Data

UK’s inflation data was the key fundamental factor during the 8/19 European session, and they weighed on the GBP/USD.

UK CPI y/y (July): 1.6%, Forecast: 1.8%, June: 1.9% – Inflation is softening and trending below 2.0%. The latest drop to an annual rate of 1.6% CPI inflation in July was mainly due to a fall in price of clothing.

cpi uk 8/19

In other inflation data points:

UK PPI m/m (July): -1.6%, Forecast: -1.0%, June: -0.9% – The Producer Price Index (PPI) has been falling 6 out of the last 7 months. And the -1.6% reading is the sharpest monthly decline in over a year. On the year, the PPI has declined at the rate of -7.3% in July.
UK RPI y/y (July): 2.5%, Forecast: 2.6%, June 2.6%

Essentially, inflation as a whole is falling in the UK. Without consumer price inflation near the 2.0% goal, the Bank of England will find it hard to raise interest rates. Rate hike expectations have gone back and forth. It has been moved up to late 2014, then moved back to early 2015. However, if inflation data continues to soften, we might need to move it even further. The prospect of a delayed rate hike put pressured on the GBP, and the GBP/USD is giving us a bearish continuation signal.

GBP/USD – Bearish Continuation

The GBP/USD Daily chart shows a market that has already been bearish since 1.7191. Last week price came down and found support at the 200-day simple moving average (SMA). We had a few days of very weak bullish attempt. Then after the soft inflation data, you can see a daily candle that is engulfing the previous few weak candles as well as the 200-day SMA.

GBP/USD Daily Chart (8/19)
gbpusd 8/19 daily chart

(click to enlarge)

The bearish continuation signal today exposes the March low at 1.6465. The decline since 1.7191 has been very persistent, without any significant consolidation. We can probably expect some consolidation if price continues to fall to 1.6465 without a hitch, especially as the daily RSI becomes more and more oversold. Look for a bullish divergence between price and the RSI. Otherwise, it will be like catching a falling knife to call reversal or bullish correction.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.