Inflation Data:
UK’s Office of National Statistics released inflation data today, and as expected, the annual CPI growth rate fell to 0.3% from the 0.5% print in December. This is the lowest annual reading on record since records began in 1960.
(click to enlarge; source: forexfactory.com)
The chart above shows that since mid 2013, inflation has been falling. It stalled a bit in the first half of 2014, but was dragged down in the second half by falling oil prices. This decline can be mainly attributed to the decline in energy prices, as prices at the factory (-3.7%) gates and at retailers (1.1%) have declined. However, if we look at inflation without oil and other volatile items, the core CPI actually rose to an annual rate of 1.4% from 1.3%, a second month of increase since the 1.2% in November (which was the lowest since December 2008).
(click to enlarge; source: forexfactory.com)
GBP/USD Reaction:
So, we have soft inflation as expected because we all know energy prices have been falling. But it seems like UK’s core inflation is stabilizing. Indeed, the the market seems to be brushing off this inflation data at least in the GBP/USD.
GBP/USD 1H Chart 2/17
(click to enlarge)
In the 1H GBP/USD chart, we can see that price edged out a new high on the month to start the week, but then retreated ahead of the UK data. After a bit of consolidation, the currency pair’s first reaction to the inflation data was a dip towards 1.53. Note that around 1.53, there is a rising trendline, the 200-hour SMA, and a previous resistance pivot. These support factors held up despite the soft inflation headline. Cable now looks poised to break the intra-session high around 1.5385 and open up the bullish continuation outlook towards 1.55, 1.56 (levels discussed in our previous GBP/USD outlook)
Now, also mentioned in the previous article, if price instead falls below 1.53, the bullish outlook might have to be shelved. Then, a break below 1.52 would revive a bearish outlook and expose the 1.4950-1.50 lows with risk of continuing lower.
As I wrap up this report, price is indeed pushing above 1.5385, making bullish continuation the likely scenario for the 5/17 US session.
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