The GBP/USD Uptrend is not Dead Yet, Despite Inflation Miss

UK inflation data for June released on Tuesday, July 18 came in below consensus forecasts.

The headline Consumer Price Index came in below expectations at 2.6% year-on-year for June compared to 2.9% expected which is what the figure was in the previous month.

The Office for National Statistics (ONS) said a fall in motor fuel prices and in recreational and cultural goods offset rises in furniture and furnishings prices.

“The Pound was quick to react as it dropped nearly 100 pips from its highs against the Dollar to trade around a key support level circa 1.3025 at the time of this writing, where we were anticipating a rebound,” says analyst Fawad Razaqzada at Forex.com.

The June CPI miss was the first time in four months that inflation has fallen below analysts’ expectations.

Other measures of inflation were mostly weaker too, with core CPI dipping to 2.4% from 2.6% while RPI slipped to 3.5% form 3.7% previously.

"The unexpected fall in inflation has now cast fresh doubt on the prospect of an interest rate rise from the BoE," says Paresh Davdra, CEO of RationalFX."The pound has dropped sharply against the dollar as a result after reaching a new 10-month high against the US currency in the early hours of trading."

But, inflation is now more or less where the Bank of England expects it to be as per their most recent set of economic forecasts and it might be too early to prejudge the Bank's thinking on the matter.

Indeed, there are questions being asked as to whether this is just a blip in inflation's run higher or whether this is a peak in CPI.

“It is worth remembering that this is just one month’s worth of data, and given that oil prices have bounced back again in recent weeks, the fall in CPI could turn out to be temporary.  So I don’t think the June CPI miss was a game changer as we need more evidence to suggest prices will fall,” says Razaqzada.

Others agree.

“Despite this month’s blip, inflation is heading towards 3% y/y and economic growth has slowed to below-trend quarterly rates, leaving the MPC with a difficult balancing act,” says Sam Hill, UK Economist with RBC Europe Limited. “Although recently the exchange rate has been relatively stable, the lags involved mean last year’s depreciation is still feeding through to higher imported inflation now and over the coming months.”

Despite today’s sell-off, the price action on the GBP/USD looks bullish thanks mainly to ongoing weakness in US Dollar.

“The cable took its sweet time but last week finally cleared a major hurdle when it closed above the 1.3000-1.3050 resistance area where it had struggled in the past. Now above this area, the path of least resistance is to the upside and will remain that way until such a time we see a distinct reversal pattern unfold,” says Razaqzada.

At the time of this writing, the cable was testing 1.3025, which was the last resistance prior to last week's breakout.

Once resistance, the Forex.com analyst believes this level could turn into support.

“If it does and we hold above it then I wouldn’t rule out the possibility of further gains in this week. Some of our bullish objectives are shown on the chart, which include 1.3240 and 1.3445. We will drop out bullish view on a potential closing break back below the 1.30 level or if there is a more significant reversal pattern formed at higher levels first,” says Razaqzada.