UK’s annual rate of inflation came in at 2.7% yesterday meeting estimates. Core CPI is at 2.3% Y/Y, slightly below the 2.4% estimated by analysts. Despite being lower than expected, both CPI figures are much higher than Bank of England (BOE)’s target inflation of 2.0%. BOE has maintained a loose monetary policy for the past few years despite inflation not touching 2.0% since Dec 2009 in the fear of worsening current recession. However, such high inflation rates narrows BOE’s scope for further inflationary easing measures. In BOE’s quarterly inflation report coming up later today, we will be able to see BOE’s opinions on this matter.
There is a possibility that BOE may be comfortable with current inflation rates. Though still grossly above target, current 2.7% CPI is much lower than ~4 to 5% inflation that we saw back in 2011. However, compared to the lows of 2012 – 2.2% in Oct, 2.7% is still a huge gap higher, though BOE may be comforted knowing that inflation rate has been staying at 2.7% for the past 3 months.
From a technical perspective, GBP/AUD remains on the down trend since the peak of ~1.81 back in 2010. Price has carved out a trading range of 1,500 pips between 1.47 – 1.62, with 2012 trading tightly within range which has narrowed considerably since then. Current price is heading back to the bottom of the wedge with Stochastic reading suggesting that price may find support along the bottom wedge to test the higher line. However, much of the follow-through no matter which direction will depend largely on BOE’s guidance with regards to current inflation figures.
Daily Chart offers an opposite perspective where price has failed to push above 1.53 convincingly. Stochastic readings suggest that a top is in place together with the failed push, with 1.50 and rising trendline providing support. Current setup is already bearish, with price looking to test bottom wedge. A more dovish BOE inflation report will help bears to potentially break the wedge to open up 1.47 floor.
GBP/USD has just formed a inverted hammer on the daily chart. AUD/USD on the other hand is staying around 1.035 which will determine whether AUD/USD will break bearish momentum to test higher or continue in current downtrend. Continue to watch these 2 pairs for further indication of GBP/AUD direction after BOE’s inflation report for more clarity.
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