Strong U.K Inflation Data Cheered – But Technicals Weigh – Will The Sterling Regain the 1.3 Handle?

GBPUSD snapped its streak of nine consecutive sessions of closing in the red thanks to the slump in the U.S dollar, and strongly positive hard data after the Brexit vote. The Sterling has registered the greatest daily gain since August 02nd following 12-year record inflation growth. This decade high reading released against the back drop of thin, late summer trading volume triggering a strong reaction in GBPUSD.

This week’s data from the UK will provide insights on UK economic performance in the month of July. Therefore, the data is expected to reflect the full effect of the U.K.’s vote to leave the European Union on the country’s economy. Tuesday’s CPI is the beginning of a batch of data including Wednesday’s average earnings and Thursday’s retail sales.

According to the Office for National Statistics, U.K inflation climbed 0.6% in July, topping the 0.5% reading expected by analysts and June’s figures. Meanwhile, import prices jumped 6.5% compared with the same period last year, rising at their fastest pace since 2011.

Since the start of this year, the pound is down 12% against the dollar and 15% against the euro including the significant selloff in the Sterling on June 24.

Meanwhile in the U.S., the cost of living didn’t fall below the median forecast by economists but at the same time it also failed to advance for the first time in five months, as energy costs fell 1.6 percent from a month earlier. After a 0.2% advance in June, Labor Department figures reported that the consumer-price index was unchanged in July.  On a year-on-year basis, prices increased 0.8% after ticking up 1 percent in the year through June.

The core CPI, which excludes volatile food and fuel costs, was up only 0.1% – the smallest gain since March, and fell short of the 0.2 percent estimate.

After the retail sales published last Friday, more signs of subdued inflationary pressures in the US economy, are weighing on the Fed’s monetary policy plans, when it comes to timing its next rate hike. It seems like a solid labor market has not created enough encouragement to cause prices to begin a gradual rise. The markets are currently pricing in a less than 50% chance for a rate hike later this year.

GBPUSD

Fig: GBPUSD D1 Technical Chart

GBPUSD has crawled backwards from the lows at 1.28489. We may want to have a look at stochastic chart where the %K line has crossed over the %D line and is heading upwards. But the two moving averages are placed above the price action with the short-term MA diverging by a huge distance from the long term 50-period average. The price action also failed in its attempt to break above the short term MA and is back below both MA’s. This signals continuing bearish momentum.

Trade suggestion

Sell Limit at 1.30450, Take profit at 1.28489, Stop loss at 1.31733

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