Market Analysis

Sterling pressured ahead of Wednesday’s key inflation readings

The British pound is trading around the 1.2900 level against the U.S Dollar on Wednesday, ahead of the release of important monthly and annual inflation readings from the United Kingdom and the United States economies. Sterling hit a three-week low earlier this week following Monday’s softer than expected GDP data from the UK economy, while the greenback firmed over positive developments surrounding the U.S government shutdown.

Sterling was also sold lower as financial markets once again lose confidence in British PM Theresa May’s ability to negotiate a Brexit deal before the March 29th deadline. Traders have faded last week’s post Bank of England rally, with the GBP/USD slumping back towards the 1.2800 level and putting sterling recent recovery into question.

Monthly UK consumer price inflation is expected to have fallen -0.7 percent during the month of January, which is a sharp drop from December’s 0.2 percent increase. Year-on-year consumer price inflation is expected to fall to two percent, which is slightly lower than the previous reading but in line with Bank of England’s 2 percent inflation target. The United Kingdom’s retail price index is expected to fall by 0.8 percent on a monthly basis, which would be the weakest RPI reading in over a year.

The Bank of England noted last week that it expects UK inflationary pressures to weaken as Brexit approaches and also because of the sharp fall in UK petrol prices, which started to take effect around November time last year. BoE policymakers are fully aware that a hard-Brexit scenario could alter the United Kingdom’s inflationary outlook quite significantly, particularly the unintended consequences of a much weaker exchange rate.

As we get closer to the United Kingdom’s departure date from the EU the more interesting dynamic in upcoming UK inflation readings will not only be the currency effects but food price inflation post and pre-Brexit, particularly if a hard-Brexit scenario occurs and the United Kingdom economy suffers from a temporary rise in food price inflation.
The latest inflation data from the ONS shows that UK food prices rose 0.7 percent during December, with overall food inflation in the United Kingdom averaging a 2.53 percent increase from 1989 until 2018. United Kingdom food price inflation reached an all-time high of 13 percent in August 2008 as the economy shrunk and sterling sharply depreciated following the financial crisis of the same year.


GBP/USD Daily Candlestick Chart | Source: ActivTrader Platform

GBP/USD Daily Candlestick Chart | Source: ActivTrader 


Sterling traders may have already priced in a weaker than expected UK inflation readings later today, while the United States economies inflation reading may provoke more volatility in the GBP/USD pair if U.S inflation significantly under or overshoot estimates.

The GBPUSD pair is expected to trade on the back foot while holding below the 1.3000 level, key resistance above the 1.3000 handle is found at the 1.3095 and 1.3200 levels. To the downside, key technical support for the pair is currently found at the 1.2890 and 1.2830 levels, with the 1.2800 level major weekly support.


Written by Nathan Batchelor, External Analyst


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