GBP/USD testing 6-month old bearish trend despite weaker inflation figures

The pound has rallied despite news inflation has fallen to a 12-year low in the UK. Although the fall in the headline CPI to just 1% in November from 1.3% in October may not be a big surprise because of the recent drop in oil prices, the fact that core CPI has also unexpectedly fallen sharply – to 1.2% from 1.5% – may be a sign for concern. Nevertheless, the lower inflation figures mean real wages are now finally rising faster than prices. Indeed, the latest ONS data tomorrow is expected to show the average earnings index in the three months to October rose 1.3% from a year earlier, up from 1% previously. The fall in prices also means that the Bank of England will probably keep interest rates at the record low 0.5% a lot longer than previously thought. As a result, the pound could come under renewed pressure in the near term. However, it is putting on a mixed performance today, rising against the dollar and falling against the euro. With the dollar index lower today, the GBP/USD’s strength may therefore be due to the USD’s weakness rather than GBP’s strength. If and when the USD selling abates, the GBP/USD could then resume its downward trajectory.

That said, the Cable’s bounce cannot and should not be ignored. If it can rally on the back of these downbeat inflation figures, imagine what it could do if tomorrow’s wage and jobs data surprise to the upside. So, there is a possibility that rates may have formed a bottom for the time being. In fact, the GBP/USD’s desire to remain above 1.5600 for several weeks now should be concerning for the bulls. What’s more, the RSI has created several instances of positive divergence which is also a bullish outcome as it means the bearish momentum is fading fast. Thus, if the Cable now breaks above a 6-month old bearish trend around 1.5750/80, we could well see some more position squaring from the sellers and possibly some buying interest, too. The next level of resistance is around 1.5800. This level was previously support and resistance. Thus a potential break above here, especially on a closing basis, could be a particularly bullish development.