GBPUSD recovers on higher than expected inflation

Jun 14, 7:42 am
Pound Sterling_GBPUSD_1406

Traders took a break from the political developments in the UK and focused turned back to the economic outlook. Data released by the UK’s Office of National Statistics (ONS) showed that consumer prices surged 2.9% in May. This was higher than the expected 2.7%, and a 0.3 percentage point increase from the month before.

The higher than expected inflation is likely to put the BoE at the crossroads, where inflation is now seen rising to 3%, a full one basis point increase from the central bank’s target rate. Inflation in the UK stands at a 4-year high.

The BoE has maintained that wage growth is also an essential piece to the puzzle. Inflation rose mostly on various factors which included food, energy, and recreational costs.

Will UK wages catch up with inflation?

Looking ahead a lot of economic releases, both from the UK and the US will keep the GBPUSD volatile.

In the UK, the monthly jobs data will be released. Expectations are for the UK’s unemployment rate to remain steady at 4.6%, same as the previous month. The Claimant count change is expected to show an increase of 12.5k, lower than 19.4k previously.

Average earnings index is expected to remain steady, rising 2.4%. This will be the most important part of today’s data from the UK. Wages continue to trail inflation, and the margin is seen to be increasing. Unless we get to see higher wages, it is quite likely that the BoE will be facing a policy dilemma.

All eyes on the US: Inflation and Fed decision

Later in the day, the data from the United States will include the inflation figures. No bullish expectations are in place as the inflation data is expected to rise at a steady pace of 0.2%, while the core CPI is expected to rise 0.2%, slightly higher than the 0.1% increase seen the month before.

On a year over year basis, the headline inflation is expected to slow to 2%, down from 2.2% previously, while the core CPI is expected to rise 1.9%, same as the month before.

The Fed’s interest rate decision will also be key for the markets today. While a rate hike is a done deal the forward guidance from the Fed will play a crucial role for the US dollar. The markets will be closely scrutinizing the Fed’s dot plot as well as any fresh economic projections that will be released today.

The Fed chair, Janet Yellen will also be chairing a press conference following the rate decision. Combined, all of this will likely see a strong reaction in the US dollar.

GBPUSD – Technical Outlook

The British pound rallied on the day, closing with a bullish bias and forming an inside bar. The overall bias remains to the downside with any upside likely to see a retest of the neckline at 1.2800 where resistance is likely to develop.

GBPUSD – Technical Outlook. Support at 1.2600
GBPUSD – Technical Outlook. Support at 1.2600
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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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