The pound dropped sharply yesterday. This was in part because of fears that today’s UK inflation data would disappoint expectations due above all to the falling price of oil. But as it turned out it was the bears that were disappointed as inflation actually increased slightly in July. According to the ONS, the Consumer Price Index (CPI) measure rose to 0.1% last month compared to a year-ago period, from zero in June. Core CPI, which strips out changes in energy, food, alcohol and tobacco prices, rose to 1.2% in July, thus achieving a five-month high. Other measures of inflation were mixed. The Retail Price Index (RPI) was unchanged at 1% as expected; PPI input – the price of goods and raw materials purchased by manufacturers – dropped 0.9%, lower than a fall of 1.8% expected, and much of this was absorbed by manufactures as output prices only declined 0.1%. Meanwhile the average UK house price rose by 5.7% in the year to June. House prices accelerated from the 5.6% growth recorded in May, although analysts were looking for an even sharper increase of 5.9%. Overall though, today’s UK data point to subdued price pressures in the UK and is unlikely to have a material impact on the Bank of England’s decision to alter monetary policy. Indeed, inflation could fall back because oil prices are continuing to head south due to excessive supply of the stuff. What’s more, China’s decision to sharply devalue its currency last week is another major deflationary force that could impact price levels not just in the UK but across the globe.
Nevertheless, today’s stronger-than-expected CPI figure is good news for the pound in the short term and this is reflected in rallying GBP/USD and other GBP crosses. As far as the Cable is concerned, the focus now shifts to tomorrow’s key CPI data from the world’s largest economy: the US. There, both the headline and core CPI measures of inflation are expected to have climbed 0.2% month-over-month in July. The year-on-year core CPI, currently at 1.8%, will get the most of the attention as we will find out whether or not it continues to move towards the Fed's 2% target. If the numbers come in line with the expectations or better, then the odds for a September rate hike would increase which could support the dollar and weigh on the GBP/USD.
That being said though, a Fed rate hike for either September or December is largely priced in now, so the dollar may struggle to gain further ground going forward, especially against some of the stronger currencies like the pound. Indeed, the daily chart of the GBP/USD is looking ever more constructive as it continues to post higher lows. Though the Cable posted a large red engulfing candle on the daily yesterday, this bearish pattern has now been invalidated because price has rallied beyond the high of yesterday and more significantly above the key 1.5670/80 resistance. It is thus displaying a large bullish engulfing candle now. If it manages to close the day above this 1.5670/80 range, then it would confirm the breakout which could lead to further technical buying in the days to come – especially if those US CPI numbers disappoint expectations. As before, the next area of resistance is at 1.5800/15 (78.6% retracement and prior resistance) followed by the June high at just under 1.5930. Thereafter is the psychological level at 1.6000 followed by the Fibonacci retracement and extension levels shown on the chart. The key support now is at 1.5560; the bias is higher while price holds above here.