Theresa May & Brexit Plan: Bearish Outlook for GBPUSD

Jan 17, 11:34 am
Theresa May_Brexit

The first day of the week came in with lack of fundamentals and liquidity, while volatility picked up on the rising fears of Brexit. However, rising volatility is what we all need to jump in to new opportunities. In today’s report, we will discuss the upcoming economic releases in the UK, what to look for, how to trade the news and what matters the most.

Expectations

Indicator

Forecast

Prior

CPI YoY

1.4%

1.2%

Core CPI

1.4%

1.4%

PPI Input

2.2%

-1.1%

PPI Output

0.3%

0.0%

Retail Price Index

2.3%

2.2%

What Does It Mean?

The entire economic releases from the UK is all about inflation, which likely to have a notable impact on the market, especially if it comes with a positive surprise along with the other inflation surprises in Europe last week.

Consumer Price Index measures the change in the price of goods and services purchased by consumer. This is considered the UK’s most important inflation data because its used as the central bank’s inflation target.

As core CPI, it measures the change in the price of goods and services purchased by consumers, excluding the volatile food, energy, alcohol, and tobacco items. The Core data has a mild impact relative to other countries because overall CPI is the central bank’s mandated inflation target. Yet, its still important to watch.

The PPI Input measures the change in the price of goods and raw materials purchased by manufacturer, while the output measures the change in the price of goods sold by the manufacturers.

As for the Retail Price Index, which is another index to watch, it measures the change in the price of goods and services purchased by consumers for the purpose of consumption. However, the RPI differs from CPI in that it only measures goods and services bought for the purpose of consumption by the vast majority of households, and it includes housing costs which are excluded from the Consumer Price Index.

Why This Is Important

The consumer prices account for a majority of overall inflation. Inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate. The average price of various goods and services are sampled and then compared to the sampling done a year earlier.

As for the PPI, its also considered as a leading indicator of consumer inflation - when manufacturers pay more for goods the higher costs are usually passed on to the consumer.

Key Event Ahead

Despite the fact that we will be waiting for those inflation data above, there will be an event which likely to overshadow any positive or negative data, which is the long waited press conference of the UK PM Theresa May which will announce the Brexit plan.

Reports and rumors are hovering around that Hard Brexit is more likely, therefore traders should not rush in to the market right after today’s inflation data is announced. It would be wise to wait and see what Theresa May will be offering and what’s the proposed plan.

GBPUSD Filling The Gap

GBPUSD began the week on a gap lower due to the announcement of the upcoming press conference, trading around 1.1990 during the first Asian session of this week. However, the pair is recovering, trading above 1.21 and testing its 1.2135 resistance area. Yet, Friday’s close was at1.2194, which means there is still a long way to go in order to fill the gap.

Today’s recovery is probably USD weakness related, as the entire fx pairs are rising against the US Dollar in early Asia. Yet, the general outlook remains bearish on GBPUSD and traders needs to watch 1.20 support area very carefully over the next few hours, as a breakthrough that support would lead to a sharp decline toward 1.18 area.

Levels To Watch

Symbol

S3

S2 S1 Pivot R1 R2

R3

GBPUSD

1.18388

1.19382 1.19908 1.20376 1.20902 1.2137

1.22364

EURGBP

0.86223

0.87117 0.8751 0.88011 0.88404 0.88905

0.89799

GBPJPY

133.949

135.65 136.563 137.351 138.264 139.052

140.753

GBPCHF

1.18937

1.20318 1.21005 1.21699 1.22386 1.2308

1.24461

 
Nour Eldeen Al-Hammoury

Nour Eldeen Al-Hammoury has more than ten years of experience in focusing on foreign exchange and global economic developments, as well as central bank policies and intermarket analysis (global markets relationships). Nour Eldeen is a regular on many major TV networks (several times each) such as: BBC Radio, BBC World News, Al-Jazeera, Al-Hurra TV CNBC Europe, CNBC Asia, CNBC Arabia, Al Arabiya, Bloomberg, Russia Today, Dubai TV, Sama Dubai, Skynews Arabia, Qatar TV and Future TV News.