Tomorrow, the Office for National Statistics will release its assessment on consumer prices in the UK for October. A relatively dull report in the last couple of months, this survey could inject some volatility in the European market session– and more importantly into the sterling. So, why all of the attention?
This time around, UK inflation is expected to pick up in the month of October, the first gain in the past three months. Analysts are forecasting a 2.3% annualized gain in consumer prices, rising above September’s 2.2% rate. But there’s ample evidence that prices may have actually declined in the month, according to recent indicators.
According to the most recent Markit/CIPS PurchasingManager’s Index, report findings showed further contraction in the sector. The decline was supported by a lower demand for UK export goods and a slowdown in the new orders component. This lack of global demand and build up in inventory is indicative of a slower pricing environment. Simply put, prices may have dipped as manufacturers and wholesalers looked to boost their market share, keeping prices relatively stable to lower.
And, housing prices haven’t gained either. According to the Halifax Bank of Scotland’s survey last week, housing prices fell by 0.7% month over month in October. The figure translates into a 2.8% annualized drop in home values in the UK– and the fourth consecutive monthly decline. Lower home values are reflective of reigning economic pessimism, which is unlikely to drive any real price gains in the short term.
Two possible scenarios are likely when it comes to tomorrow’s CPI release:
1. CPI is released at 2.3% or higher. With inflation at or above expectations, the report would further muddle the Monetary Policy Committee’s decision come December 6th. Previous expectations were for the committee to suspend monetary easing, especially in the face of surging GDP. However, with recent data disappointing far below market estimates in the last month, it seems that overall sentiment – as well as the central bank’s belief – has changed. Should inflation rear its ugly head, it would be more difficult for policymakers to conduct any further expansionary policy in order to support the economy.
2. CPI is released below 2.3%. This outcome is far simpler as it would boost the likelihood of another round of asset purchases at the beginning of next year. Central bankers, although still worried over plausible inflationary spikes, would be more accepting of further monetary easing – especially if it looks like their Funding for Lending program begins to flail.
With GBPUSD already breaking through support at 1.5918, the next support level in focus will be the 1.5796 50% fib support. If tested on a temporary spike down, the level could act as a barrier, and opportunity, for pound bulls on a retracement towards initial resistance at 1.5930. A subsequent upside penetration of the1.5930 would automatically activate subsequent 1.5978 resistance.
Source: FXTrek Intellicharts