GBPUSD recovers after initial drop on the back of CPI surprise

Despite news that the UK inflation climbed its highest rate since March 2012, the GBP/USD initially dropped to its lowest level since 28th November, underscoring investors’ scepticism over last week’s Brexit deal, before bouncing back. Expectations were for the the UK CPI to rise by a modest 0.2% month-on-month, which would have kept the year-over-year rate at 3.0%. Instead, CPI rose by 0.3% month-on-month and this pushed the annual rate of inflation to 3.1%. As a result, the Bank of England Governor, Mark Carney, will suffer the humiliation of having to write a letter to the Chancellor explaining why inflation is more than 1.0% above the 2.0% target. The latest rise in UK CPI was driven by the cost of air fares and computer games, according to the the Office for National Statistics. Other measures of inflation were mixed. Core CPI remained unchanged at 2.7% y/y as expected; RPI unexpectedly eased to 3.9% from 4.0%, while both PPI input and output costs rose by above forecast 1.8 and 0.3 percent month-over-month respectively.

But the pound’s losses could be contained if tomorrow’s data brings some good news. The Average Earnings Index is expected to have risen by 2.5% in the three months to October compared the same period a year ago. If correct, this would be up from 2.2% recorded previously, and it would mean that the gap between nominal wages and inflation would have narrowed a little. Meanwhile the unemployment rate is expected to remain steady at 4.3% while jobless claims are seen rising by a modest 400 applications month-over-month in November, compared to 1,100 the month before. For the GBP/USD traders, the focus will then turn to the US where will also have the latest CPI ahead of the expected Federal Reserve rate increase later on in the day.

From a technical perspective, not a lot has changed for the Cable, although its reluctance to go up as quickly as we had envisaged earlier in the month is making us question our bullish view a little bit. Still while the longer term bullish trend holds, the cable remains in an uptrend, so we maintain our bullish view for now. The key support that needs to hold in the short-term though is at 1.3300-1.3340 area, previously resistance. The monthly chart in the inset shows the price is also at a long-term support area around 1.3365.