- 52% of all pending orders are to acquire the Pound
- 54% of all open positions are long
- Gains could be capped around 1.28
- Significant support rests circa 1.2624
-
Upcoming Events: UK Average Hourly Earnings Index, UK Claimant Count Change, UK Unemployment Rate, US CPI and Core CPI, US Retail Sales and Core Retail Sales, US Crude Oil Inventories, US Federal Funds Rate, FOMC Statement
British inflation hit its highest level in nearly four years last month, putting pressure on consumers. The Office for National Statistics reported on Tuesday that its CPI surged 2.9% year-over-year in May. That followed a 2.7% rise in the preceding month and marked the largest increase since June 2012. The consumer price jump was mainly driven by the sharp fall in the value of the Pound. In the meantime, the so-called core CPI climbed 2.6% during the reported month, compared to the prior month's gain of 2.4%, whereas analysts anticipated an increase of 2.3%. Since inflation is rising at a quicker-than-initially-estimated pace, it is not clear for how long the Bank of England will tolerate the inflation rate above the 2% target.
Other report released by the ONS revealed that input prices for producers dropped 1.3% on a monthly basis in May, following April's downwardly revised fall of 0.3% and surpassing expectations for a 0.5% decline. Thus, on an annual basis, rose just 11.6%, down from April's 15.6%. Tuesday's data also showed that the Retail Price Index climbed 3.7% year-over-year in May, topping expectations for a 3.5% climb.
Watch More: Dukascopy TV
All focus turns to the Fed
Today the UK employment data is due, but is unlikely to have a serious impact on the markets, as all attention turns to the US fundamentals. First of all, the US CPI, which is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of USD is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. In Core CPI those volatile products, such as food and energy, are excluded in order to capture and accurate calculation. Second come the Retail Sales. They measure the total receipts of retail stores. Monthly percent changes reflect the rate of changes of such sales. Changes in Retail Sales are widely followed as an indicator of consumer spending. The Core Retail Sales exclude the automobile sector. The Fed is also to decide on its funds rate today. With a pre-set regularity, a nation's Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one being the interest rate, that it will charge on loans and advances to commercial banks. In the US, the Board of Governors of the Federal Reserve meets at intervals of five to eight weeks, in which they announce their latest decisions. A rate hike tends to boost the local currency, as it is understood as a sign of a healthy inflation. A rate cut, on the other hand, is seen as a sign of economic and inflationary woes and, therefore, tends to weaken the local currency. If rates remain unchanged, attention turns to the tone of the FOMC statement, and whether the tone is hawkish or dovish over future developments of inflation.
Read More: Fundamental Analysis
GBP/USD: downside risks persist
In spite of bearish signs, the Sterling managed to appreciate against the US Dollar on Tuesday, successfully retaking the 1.27 level. Gains were limited by the monthly S1, but this area risks getting overcome today, with focus being on the Fed meeting. A rate hike is priced in, but a dovish outlook is still somewhat expected, which is to strengthen the Cable further and allow it to approach the 1.29 handle. However, technical indicators keep giving strong bearish signals, refusing to confirm the possibility of the positive outcome. A hawkish surprise from the Fed could be the result, in which case the GBP/USD pair is likely to retreat towards the monthly S2 at 1.2624 again and possibly even pierce it. Meanwhile, traders remain undecided, as their sentiment is relatively neutral—54% of all open positions are long.
Hourly chart
According to the daily chart, the Cable is likely to edge further down, with the monthly S2 not necessarily limiting the losses. Ultimately, the Pound risks slumping to 1.25, as a follow-up after the wedge's breach. On The other hand, the RSI is nearing its lower border, which indicates that a potential strong recovery could occur. In either case, it all depends on the Fed today.Daily chart
Read More: Technical Analysis
Traders remain neutral
Market sentiment remains somewhat bullish, as 54% of all open positions are still long. At the same time, there are 52% of all pending orders set to buy the British Pound.
A less optimistic situation is observed elsewhere. The sentiment at OANDA remains bearish, namely 58% of all open positions are short and the remaining 42% are long. Meanwhile, sentiment at Saxo Bank is also bearish, with 61% of traders now being short and the other 39% - long on the Sterling against the US Dollar.
Spreads (avg, pip) / Trading volume / Volatility
Traders see Pound recovering
© Dukascopy Bank SATraders believe the Cable is to rise above the 1.28 major level by the end of the next three months, as 54% of survey participants share this belief. While the current price is around 1.27, the average forecast for September 14 is 1.2845. The 1.34-1.36 range is still the most popular price interval, having 20% of the votes, while on the second place is the 1.20-1.22 interval, with 16% of the voters choosing it.