Summary:

  • UK CPI Y/Y for July +2.6% vs +2.7% exp and 2.6% prior
  • Core CPI Y/Y: +2.4% vs +2.5% exp and 2.4% prior
  • GBPUSD falls to lowest level since mid July following the release

 The latest inflation data has given the BoE a little more wiggle room after the CPI Y/Y for July showed a smaller than expected increase. The rise of 2.6% is lower than the consensus forecast for a 2.7% rise and inline with the prior print. Today’s print marks the second successive lower than expected number for this widely viewed measure of inflation and the strong rise seen since the start of the year appears to have been halted.

Even though the reading is significantly above the 2% target for the BoE the fact that it is below forecast will be pleasing to Governor Carney and the other members of the MPC and will allow the rate-setting committee a little more leeway when it comes to policy decisions going forward. Furthermore the core reading of +2.4% Y/Y was below the forecast of +2.5%. 

In terms of market reaction the pound has experienced a swift move lower with the GBPUSD falling some 40 pips since the release to trade at its lowest level in a month just above the 1.29 handle. 

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 The GBPUSD fell by around 40 pips following the lower than expected CPI reading. Source: xStation

Longer term the outlook for this market could be changing. If we use the 8 and 21 period EMAs to identify the trend then the recent bearish cross (8 below 21) could be seen as a signal that the market is now in a downtrend. There have only been 6 crosses in this pair since the start of the year (3 bullish and 2 bearish) and each time there’s been a sustained move in that direction. 

The area around 1.2813 could be a possible first target for shorts but if price falls through here then 1.2585 is possible. One glimmer of hope for bulls is the rising trendline seen since the March low. Price is currently testing this level and it could attract some longs into the market. 

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 The GBPUSD has recently printed a bearish cross with the 8 and 21 EMAs on D1. Previous occasions this has occurred this year have led to sustained moves to the downside. Source: xStation