GBP/USD fell to a low of 1.3225 on Monday after reports hit the wires that that unless the European Union concedes on some key issues, Brexit talks could collapse.
The currency pair kept a low key in Asia, as it traded largely in the sideways manner below 1.3268 (38.2% Fib retracement of Sept. 20 high - Oct. 6 low).
All eyes on inflation
Kathy Lien from BK Asset Management writes, "according to the PMIs, price pressures accelerated in the month of September".
The UK consumer price index due for release at 08:30 GMT is expected to show the cost of living jumped to 3% y/y in September from 2.9% in August. A rise to 3% or more would improve the odds of a rate hike in 2018. As of now, the economists expect the BOE to hike rates in November and then maintain the status quo throughout 2018. Thus, British Pound would gain if the CPI prints at 3% or above 3%.
However, the gains may not be sustainable as fears are mounting that a "no deal Brexit" could see Pound drop to parity with the Euro.
On the other hand, the odds of a BOE rate hike in 2018 would drop if the CPI prints below the August figure of 2.9%. In this case, Sterling could revisit 50-day moving average level of 1.3149.
GBP/USD Technical Levels
A break above 1.3268 (38.2% Fib retracement of Sept. 20 high - Oct. 6 low) could see the pair test supply around 1.3338 (Oct 13 high). A cut through the same would validate the argument that the pair has bottomed out at 1.3027. The subsequent move higher could be extended to 1.3443 (Sep 29 high).
On the downside, breach of support at 1.3251 (1-hour 100-MA) could yield a pullback to 1.3197 (1-hour 200-MA). A violation there would mean the corrective rally from the low of 1.3027 has topped out at 1.3338 (Oct 13 high). The spot could then re-test 1.31 handle.
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