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Weak Inflation Nudges GBP/USD Back to a Downtrend

Inflation in the UK fell to the lowest rate in 5 years, as the CPI grow only 1.2% year-over-year in September. 
UK CPI y/y (Sept): 1.2%
Forecast: 1.4%
Previous 1.5%

(click to enlarge; source:

Other measures of inflation, the PPI and RPI, were both soft in September. This falling trend in inflation will move BoE's interest rate hike schedule down the line. It is unlikely to be able to raise rates in Q1 2015 like the market had projected a couple of months ago.

The GBP/USD is reacting sharply after the soft inflation data. 

(GBP/USD 4H Chart 10/14)

After the rally from 1.5950 to 1.6226, GBP/USD was already retreating. Before the data point, we had what looks like a head and shoulders, except this is formed during a downtrend. In this scenario, this pattern is a signal of bearish continuation.

The inflation data nudged GBP/USD over the cliff and it is now in bearish continuation threatening to make new lows on the year below 1.5950. Below 1.5950, we immediately have a key support area above 1.5850, representing the lows on the consolidation during September through November 2013.

(GBP/USD Weekly Chart)