After the slow and calm start of the week with no economic releases and lower volume across the board, volatility is set to pick up during the second trading day of the week, as we wait for many economic figures ahead.
Today we will be concentrating on the UK inflation figures, which are expected to have a notable impact on the markets, especially after last months’ rise.
Expectations
| Indicator | Forecast | Prior |
| CPI YoY | 2.2% | 2.3% |
| Core CPI YoY | 1.8% | 2.0% |
| PPI Input MoM | -0.5% | -0.4% |
| PPI Output MoM | 0.2% | 0.2% |
| Retail Price Index YoY | 3.1% | 3.2% |
| House Price Index YoY | 6.1% | 6.2% |
By looking at the table above, the estimates are mixed, but the bigger picture shows a possibility for a softer data in March compared to February’s outcomes.
The CPI YoY stands at 2.3% in February, which is the highest inflation rate since 2014. The CPI also advanced for four months in a row, surpassing the Bank of England 2% target.
Moreover, the Core CPI is already at the 2% target, which is the highest reading since June of 2014, which should be concerning for the Bank of England.
What If?
There are many scenarios for today’s data, but let’s stick to the major two scenarios
- If the figures come in as expected (softer) in March, this will give the Bank of England some relief, as softer data means there is no overshooting in inflation. In return, there is no need to adjust the current policy anytime soon.
- If the figures come in with a surprise higher including CPI and Core CPI, this will put the Bank of England in the corner, as this is not the right time for inflation to pick up faster than the estimates, amid Brexit negotiations, low rates, and higher stimulus packages.
Market Impact
The possible impact for both scenarios above is as follows
- Softer data (in line with estimates) would push GBP pairs lower again, as softer data means that the Bank of England will sit tight with no need to adjust the current policy anytime soon.
Last month when inflation soared above the BOE target, the bank advised traders not to overreact to one-month data and to wait for more data to come. Today is the day to decide on whether GBP would continue to weaken or another bull run is in the making
- Positive surprise (higher than February’s data) would push GBP pairs higher, as higher inflation would mean that there is a risk of overshooting inflation. In return, there would be a possibility for an adjustment by the Bank of England, whether by raising rates and/or decrease the level of purchases.
GBPUSD Outlook
GBPUSD traded lower at the end of last week, closing Friday’s trading below its 50 and 100 DAY MA, correcting by 50% from its recent rally as shown on the chart.
However, yesterday, the pair bounced off that support and retested those MA’s again around 1.2415, which remains solid.
Yet, the technical indicators are still pointing to the downside and still far away from being oversold, which increases the chances for a deeper retracement ahead.
In the meantime, the first immediate support stands at 1.2360’s followed by the 61.8% Fibo which stands around 1.23. Those levels could be seen especially if today’s inflation figures come with softer data.
On the other hand, any positive surprise from today’s inflation figures would lead to a recovery above Friday’s high, which means that there would be a possibility to visit 1.2480. However, the first immediate resistance remains at 1.2440.
A break above both levels would clear the way for further gains possibly above 1.25 and even more. The significant resistance stands around 1.2530, which represents its daily downtrend line resistance, which likely to hold and may stop the upside rally.
