GBP/USD – Pound Dips Below 1.32 Despite Improved CPI

The British pound has posted considerable losses on Tuesday, erasing the gains from the Monday session. GBP/USD is currently trading at the 1.32 level. On the release front, the UK released a host of consumer inflation indicators, led by CPI. The index posted a respectable gain of 0.5%, beating the forecast of 0.4%. In the US, we’ll get a look at construction data, with the release of Building Permits and Housing Starts. Neither indicator is expected to show much change in the June reports. On Wednesday, it’s another busy day in the UK, with the release of key employment reports, led by Employment Change.

The pound has started the week quietly, in sharp contrast to last week, which was marked by strong volatility. A solid CPI reading for June failed to boost GBP/USD. CPI climbed 0.5%, its strongest monthly gain in three months. Other inflation indicators also beat their estimates. Still, we’ll have to wait for the July CPI report to better gauge the fallout of the Brexit vote, which took place on June 23.

The mood in Britain is anything but positive, and some economic indicators are pointing to a downturn in the economy since the Brexit referendum vote in late June. Housing prices are slightly lower, while retail footfall dropped in June. On Thursday, the BoE surprised the markets by staying put and not lowering interest rates. The markets had widely expected a quarter point cut from the BoE, which would have marked the first rate cut since July 2009. BoE Mark Carney had strongly hinted at the move when he recently stated that economic conditions had deteriorated and the BoE would need to lower rates this summer. With Carney passing on a move last week, that means there is a strong chance that the BoE will lower rates at its next policy meeting on August 4. Central banks prefer not to reveal their cards, but another balk by Carney next month would hurt the credibility of the BoE, so it’s likely that we will see a move at the August meeting. Andrew Haldane, the BoE’s chief economist has urged the central bank to act “promptly as well as muscularly” in order to cushion the financial blow from Brexit. This appears to be a call for a comprehensive response, not just a quarter-point rate cut. The pound soared on Thursday after the BoE surprise and chalked up 230 points, only to surrender most of those gains on Friday.

On the political front in Britain, there was no shortage of drama last week. Theresa May replaced David Cameron as Prime Minister on Wednesday, as the changing of the guard at 10 Downing took place much more quickly than expected – Cameron was widely expected to hang on as caretaker leader until October. May didn’t waste any time in making key appointments and axing some veteran ministers in the process. She has appointed a minister in charge of the Brexit negotiations with the EU and has appointed Boris Johnson as foreign secretary. Johnson and EU leaders do not enjoy a good relationship, but with the Brexit vote shock starting to subside, all parties with have to attend to the business at hand – commencing negotiations over Britain’s departure and establishing a new trade relationship between the EU and Britain.

The markets had plenty of US consumer indicators to sift through on Friday, and the numbers were a mixed bag. US consumer inflation reports posted small gains of 0.2%, as inflation levels remain soft. There was better news on the consumer spending front, as Core Retail Sales posted a strong gain of 0.7%, beating the estimate. The UoM Consumer Sentiment report dipped below the 90-point level for the first time in three months, and was short of expectations. The Federal Reserve is unlikely to raise rates before September at the earliest, unless there is some strong improvement in economic data, particularly inflation and wage growth, which remain at low levels.

GBP/USD Fundamentals

Tuesday (July 19)

  • 4:30 British CPI. Estimate 0.4%. Actual 0.5%
  • 4:30 British PPI Input. Estimate 0.9%. Actual 1.8%
  • 4:30 British RPI. Estimate 1.4%.Actual 1.6%
  • 4:30 British Core CPI. Estimate 1.3%. Actual 1.4%
  • 4:30 British HPI. Estimate 7.9%. Actual 8.1%
  • 4:30 British PPI Output. Estimate 0.1%. Actual 0.2%
  • 8:30 US Building Permits. Estimate 1.15M
  • 8:30 US Housing Starts. Estimate 1.17M
  • 22:05 BOE Deputy Governor Ben Broadbent Speaks

Upcoming Key Releases

Wednesday (July 20)

  • 4:30 British Average Earnings Index. Estimate 2.3%
  • 4:30 British Claimant Count Change. Estimate 4.1K
  • 4:30 British Unemployment Rate. Estimate 5.0%

* Key releases are in bold

*All release times are EDT

GBP/USD for Tuesday, July 19, 2016

GBP/USD July 19 at 5:45 GMT

Open: 1.3264 High: 1.3271 Low: 1.3169 Close: 1.3202

GBP/USD Technical

S1 S2 S1 R1 R2 R3
1.2938 1.3064 1.3142 1.3219 1.3349 1.3513
  • GBP/USD is on a downward trend, having posted losses in the Asian and European sessions
  • 1.3142 is providing support
  • 1.3219 has switched to a resistance role following losses by GBP/USD. It is a weak line

Further levels in both directions:

  • Below: 1.3142, 1.3064 and 1.2938
  • Above: 1.3219, 1.3349, 1.3513 and 1.3675
  • Current range: 1.3142 to 1.3219

OANDA’s Open Positions Ratio

GBP/USD ratio is showing slight movement towards short positions. Long positions have a small majority (52%), indicative of slight trader bias towards GBP/USD reversing directions and moving to higher levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental and macroeconomic analysis, Kenny Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in major online financial publications including, Seeking Alpha and FXStreet. Kenny has been a MarketPulse contributor since 2012.