UK CPI Miss Unable to Deter GBP Fragility

POUND STERLING TALKING POINTS

• UK CPI misses but PPI beat could be troublesome down the line.
• Little change in BoE forecasts for tomorrow, 25bps hike expected.
• GBP/USD arrives into oversold territory on RSI.

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.

GBP/USD ECONOMIC CALENDAR (GMT +02:00)

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

Source: Refinitiv

TECHNICAL ANALYSIS

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:

Key support levels:

BEARISH IG CLIENT SENTIMENT

IG Client Sentiment Data (IGCS) shows retail traders are currently 70% LONG on GBP/USD (as of this writing).

Download the latest sentiment guide (below) to see how daily and weekly positional changes affect GBP/USD sentiment and outlook!

Contact and followWarrenon Twitter:@WVenketas