GBP/USD: UK inflation report key to unlocking string of BoE rate cuts

UK inflation report due 7am BST
Core, services inflation figures key
Markets 96% priced for November BoE rate cut
GBP/USD showing tentative signs of bottoming

Overview

GBP/USD is at risk of breaking out of the narrow trading range it’s been sitting in over the past fortnight with the UK consumer price inflation (CPI) report for September released later in the session. With so much uncertainty regarding signals from labour market data given poor response rates, this is the only UK data point that can still generate meaningful volatility in the pound.

Core, services figures to drive direction

The economic calendar below shows how various inflation measures are expected to print relative to a month ago.

While there will be ample headlines if the headline CPI annual rate comes in below the Bank of England’s 2% target as forecast, market reaction is likely to be determined by the core inflation rate which strips out volatile price movements. It’s forecast to rise 0.3% over the month and 3.4% for the year, the latter down two-tenths on the pace seen in August.

It's not shown on the calendar, but the services inflation rate is arguably the most important of all given the linkages to wage pressures. It rose 5.2% in the year to August after printing 5.5% in July. A continuation of that trend is important for the path of UK interest rates given the BoE expects services inflation to sit near 5.3% by year-end.

Source: BoE

Inflation report more important than usual

Before the inflation report, swaps markets are near fully priced for the BoE to deliver the second rate cut of the easing cycle, putting the probability of a 25 basis point move in early November around 96%. Further out, another cut is fully priced by February.

Earlier this month, BoE Governor Andrew Bailey told the Guardian newspaper the central bank could become "a bit more activist" in reducing rates depending on incoming inflation data, putting increased emphasis on Wednesday’s update. Prior to his verbal intervention, markets were divided on whether the BoE would cut rates before year-end.

GBP/USD bottoming?

GBP/USD is showing tentative signs of bottoming before the report, continuing to attract buying below 1.3040, each time at incrementally higher levels which have helped form a triangle pattern.

RSI (14) has broken its downtrend, signalling a potential shift in price momentum. MACD has yet to confirm, suggesting traders should keep an open mind on whether to favour selling rips or buying dips.

On the downside, minor support is located at 1.3022 and 1.3002. Nothing meaningful is found until 1.2940 and 1.2878. Above, the 50-day moving average has a chequered track record of being respected but is worth putting on the radar. Sellers may also be lurking at 1.3158 and 1.3249.

-- Written by David Scutt

Follow David on Twitter @scutty

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.