Here’s How to Trade GBP/USD Ahead of Key CPI Data From Both Sides of the Atlantic
2024.08.13 16:37
The just-released US report was weaker than expected and we saw an immediate drop in the in response. Earlier we had mixed-bag UK employment data helping to lift the across the board.
The GBP to USD pair will be facing more tests later this week with CPI inflation and retail sales data to come from both sides of the pond.
In recent days, market volatility has died down and the US dollar has fallen against the high-beta commodity dollars and risen against low-yielding currencies like the .
If we don’t see any upside surprises in US and activity data later this week, this should cause the US dollar to fall further and support the GBP/USD modestly.
US PPI Comes in Softer
The report was estimated at 0.2% month-on-month on both the headline and fronts. However, it came in at 0.1% on the headline and flat on the front. The year-over-year rate was 2.2% compared to 2.3% expected, down from a revised 2.7% the month before.
As a result of the weaker PPI data, we saw a bit of a weakness in the US dollar across the board, which helped to keep the cable near the 1.28 handle.
Pound Faces a Key Week
As well as the US, this is also an important week for UK data. After today’s release of mixed-bag UK jobs data showing a drop in the (to 4.2% from 4.4%) but a big rise in (135K vs. 14.5K expected), the focus will be on the latest UK and data later this week.
These data releases could help set expectations for the Bank of England’s future policy trajectory after the UK central bank delivered its first cut in 4 years earlier this month, lowering the base rate by 25 basis points to 5% in a knife-edge decision that split the Monetary Policy Committee.
At the August 1 meeting, the MPC was quite cautious in its language and gave away very little about when we can expect to see further rate cuts. They argued that rates would need to “remain restrictive for sufficiently long”, because of uncertain inflation outlook. The BoE expects CPI inflation to rise to 2.75% in the second half of the year.
The market expects at least one more 25 bp cut before the year is out, but I believe this is far too conservative – especially with the Fed now seen cutting rates more aggressively than previously expected.
Indeed, the BoE is wary of the economic pain high interest rates are bringing to the UK economy with many households and businesses struggling with high debt repayments. They will be keen to cut rates further as soon as data allows them to do so. With the BoE having started the cutting cycle, upcoming inflation reports from the UK will be very important and could significantly impact the MPC’s rate decisions.
US Dollar: All Eyes on US Inflation and Retail Data
Following the recent disappointing jobs report and PMI, as well as today’s weaker PPI report, a surprisingly weak CPI inflation report on Wednesday could significantly impact the US dollar, which has recently lost some of its yield advantage.
Economists predict +0.2% month-on-month increases for both headline and figures. If CPI comes in higher than expected, it might challenge the anticipated acceleration of rate cuts that the markets have priced in. Conversely, if CPI tracks the PPI lower, then the markets could gain more confidence in the roughly 100 basis points of rate cuts expected in 2024, potentially putting more downward pressure on the dollar.
In addition to inflation data, we’ll also see some US activity data this week, including July retail sales on Thursday and earnings reports from retailers like Walmart (NYSE:) and Home Depot (NYSE:). These will provide insights into the health of US consumers and provide clues on whether tight US monetary policy has started to affect consumption. Analysts are forecasting weak activity data, which could further weigh on the US dollar if their predictions hold.
Key Data Highlights for GBP/USD Pair
Here’s a full list of the key data highlights on the economic calendar relevant to the GBP/USD pair for the remainder of this week.
How to Trade the GBP on the Back of UK Data This Week?
Given my feeling that the market is pricing the BoE easing cycle conservatively, any downward surprises in UK CPI or retail sales data should boost the appeal of the , and . But with regards to the GBP/USD pair, a weakening US dollar will mask any data-driven drops in the pound.
Thus, in my opinion, the GBP/USD pair is best to trade on the long side, especially if we see stronger-than-expected UK data this week and/or weakness in US macro pointers. Today’s weaker PPI data from the US is certainly helping the cause.
GBP/USD Technical Analysis and Trade Ideas
In early July, the GBP/USD broke its bearish trend line that had been in place since last summer. While the cable’s run of 4-weekly bearish candles may point to a potential false breakout scenario, the breakout has not been completely invalidated to turn the technical GBP/USD forecast bearish yet.
However, that could change should we break July’s low of 1.2615 in the coming days. But with a weakening US dollar, I think there is a decent chance for a bounce at around the 1.2700 – 1.2750 support area this week. The upper side of the broken trend line and the point of origin of the bullish breakout both converge around this zone.
For as long as this area holds, I will maintain a modestly bullish technical view of the cable. The GBP/USD now needs to clear resistance in the range between 1.0800 to 1.08500 to potentially fuel a short-squeeze rally.
Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
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