GBP in focus as markets expect another jump in UK inflation

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The pound looks primed for potential upside as traders look for a potential 10.7% inflation figure tomorrow morning. Could a US-UK CPI divergence help lift sterling

Source: Bloomberg

 

 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 15 November 2022 

UK inflation expected to continue its push higher

The past week has seen major volatility throughout financial markets, with the decline across both headline and core inflation in the US lifting hopes that we will see the Fed take their foot off the gas. However, that upward trajectory for prices is not equal across countries, with European inflation yet to show a similar reversal in its trajectory. That fact comes back into the limelight tomorrow as the latest UK inflation figure is released at 7am. The chart below highlights how that turn for US inflation has created a situation where UK CPI has outstripped US price growth by the highest degree since early 2011. During the 2010 period where the gap was widening, we did see GBPUSD strengthen before falling back once again.

Much comes down to risk assets given the role of the dollar as a haven when markets are turning lower. However, we could yet see another similar period of upside for GBPUSD if global markets remain confident based on the idea that US inflation has topped out. With that in mind, keep a close eye out for tomorrows UK CPI number. While US interest rates are above those in the UK, we have heard from several Fed members that point towards a slowing in the pace of rate hikes after four consecutive 75-basis point hikes. In the UK, markets are somewhat split about whether we will see a 50 or 75bp move, but those expectations are likely to shift once we see the latest inflation data. Given widespread expectations of a whopping 10.7% CPI figure in the UK, there is a good chance we see the Bank of England maintain a rapid pace of tightening as the Fed starts to slow.

GBPUSD technical analysis

Looking at GBPUSD, we can see how the recent US inflation data helped drive the pair up through trendline resistance. With price also pushing through the 76.4% Fibonacci resistance level today, there is a good chance we see the pair push higher in the event that UK inflation increases as expected. Although it is worth mentioning that the risk to that theory is the potential for a risk-off move for markets which could see the pair move lower. Thus, it is worthwhile keeping an eye out for the wider market moves too as a gauge of where the dollar might move.

Source: ProRealTime

GBPJPY technical analysis

While GBPUSD could benefit if markets continue to trade in a risk-on environment, it is worthwhile following GBPJPY given the Bank of Japan’s unwillingness to tighten in the face of rising inflation. Especially given the fact that Japanese CPI stands at a lowly 3.0% as of September. Given the many years of largely non-existent inflation in Japan, this above-target figure simply allows them to play catch-up. As such, another pop in UK inflation would likely provide another move higher for GBPJPY. The daily chart highlights how price has recently dropped back into the 76.4% Fibonacci support level, As such, bullish positions are favoured unless price drops through the 15974 swing-low.

Source: ProRealTime