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Hot UK Inflation Data Fueling the GBP/USD for Bullish Continuation

UK consumer inflation picked up in June much faster than expected. The headline reading came in at an annualized rate of 1.9%, much higher than the 1.6% forecast and 1.5% in May. 

According to the Office of National Statistics (ONS) the pickup in the CPI was led by clothing, food, and air transport sectors. Clothing was seasonal, and we have seen food prices level off this month, suggesting the hot inflation rate could be temporary. Even so, it seems like the CPI found a bottom. Carney noted that inflation expectations are anchored and improved. This suggests he is not too concern about inflation being too hot,. Still, with the inflation rate near 2.0%, the BoE will have more room to raise rates. The 2014 rate hike seems a little more likely with the hot CPI data. The chart below shows inflation "anchored" and coming back to the 2.0% target rate.

UK Inflation since 2004:

(source: Office of National Statistics)

The GBP/USD rallied sharply after the inflation data was released, threatening to break above a 2-week consolidation.

(gbpusd 4h chart. 7/15)

Since the prevailing trend is bullish and intact, today's bullish push is poised to break that 1.7180 consolidation high. If the market does push above 1.7180 and holds above the broken consolidation range, the next target could be 1.7337. The monthly chart below shows that this is the 50% retracement of the 2008 dip.

(gbpusd monthly chart. 7/15)