While the rally in GBP/USD following the release of U.K. September CPI data faded, the pair has caught a bid and is now trading near the highs of the session near 1.2280, up 0.80% over Monday’s N.Y. close. The move higher appears in reaction to headlines noting that a U.K. government lawyer stated that U.K. parliament will “very likely” have to ratify agreement with EU when the country exits the bloc. And that EU and Britain could agree that any deal would come into effect without parliamentary approval.
As a result of today’s move higher, first resistance at 1.2325, the high of the mediocre rebound attempt following the establishment of the October 11th closing low, is now in focus. A sustained break above this level is required to turn the short term trend in the pair higher. The next level to watch as potential resistance on a move above 1.2325 is 1.2517, which represents a 38.2% retracement of the decline from the early September high. The pair is currently testing the 23.6% retracement level. Key resistance does not come into play until the 1.28 level.
With the pair vulnerable to wide swings in reaction to headlines surrounding Brexit, rally attempts appear particularly fragile and any near term buying holds a high degree of risk. Should the current rally attempt fail, near term support is at the lower boundary of a trading range formed on the 15-minute chart near the 1.2220 level. A drop below the bottom of this trading range leaves the next short term downside target at the 1.22 handle, followed by 1.2170.
On the daily chart, the pair continues to hold in a narrow consolidation phase, which has been intact since the October 11 closing low was established. Support on the daily chart comes into play at the October 11/12 lows at the 1.2115/1.2089 zone, followed by the low of the October 7 flash crash at 1.1950. This level is given added reinforcement by the psychologically important 1.20 handle. Below this area, support in the pair is lacking. With the longer term trend down and a lack of support other than the recent established lows, the coming months have the potential to be rough for the pair, suggesting rally attempts appear best used as selling opportunities until signs of a sustained bottom begin to emerge. No such signs are currently present.
U.K. CPI was essentially a non-event for GBP/USD, as the pair initially spiked higher, but failed to maintain the gain. U.K. consumer prices increased 0.2% in September, which lifted the year-over-year reading to 1.0% from 0.6%. This represents a 22-month high and was slightly above the expected annualized rate of 0.9%. The core annual inflation rate also increased to the highest level for two years at 1.5% from 1.3% and was also above the expected rate of 1.4%. There was an increase in the RPI inflation rate to 2.0% from 1.8%.
With U.K. CPI now in the books, the focus becomes today’s release of U.S. September CPI, which is due out at 8:30am EST. Consensus estimate for Sept. CPI is 0.3%, while the Core CPI consensus forecast is at 0.2%. This will be a key metric in the Federal Reserve’s decision to raise rates before the end of the year, a factor that will have bearing on the dollar. As of Monday’s close, Fed Fund futures were indicating a 69.5% chance of a rate increase at the December meeting.