The currency markets were abuzz with activity as the British Pound Sterling (GBP) experienced a rollercoaster ride after the release of the UK Consumer Price Index (CPI) report, which revealed a UK CPI miss. The report showed that inflation fell from 30-year highs, leading to significant movements in volatile currency pairs like GBP/USD and EUR/GBP. In this article, we will delve into the key factors that contributed to the pound’s volatility following the UK CPI miss, how it impacted GBP/USD and EUR/GBP rates, and what traders can expect from the Bank of England’s (BoE) monetary policy decisions.

A Comprehensive Analysis of Impact on GBP/USD and EUR/GBP

The UK CPI measures the average change in prices of a basket of goods and services consumed by households. A high CPI indicates rising inflation, which can have significant implications for a country’s economy and monetary policy. In recent months, the UK has experienced surging inflation, reaching 30-year highs, mainly driven by factors such as increased prices for alcohol, tobacco, clothing, footwear, and housing and household services.

However, the latest UK CPI report brought a glimmer of relief for UK consumers, as inflation showed a decline from its peak levels. One crucial component in the report was the core inflation print, which came in at 6.9%. This figure suggested a possible peak in the inflation cycle, indicating that the aggressive monetary policy adopted by the BoE may be starting to have an impact.

The currency markets reacted swiftly to the UK CPI miss, and the British Pound Sterling (GBP) experienced a significant drop. The GBP/USD pair declined by over 0.5%, breaking below the crucial psychological level of 1.3000. The EUR/GBP pair also rallied post-release, trading above the June swing high at 0.8658.

These sharp movements highlight how volatile currency pairs can be, especially when faced with economic data that deviates from market expectations. Traders need to exercise caution and stay well-informed about upcoming economic releases to navigate the forex market effectively.

BoE Rate Hike Expectations and Their Influence on GBP Pairs

The BoE has been closely monitoring inflation trends and market conditions to determine the appropriate monetary policy response. Prior to the CPI release, market participants were pricing in a preference for a 50bps rate hike in August, with the peak rate estimated at around 6.15%.

However, the recent decline in the core inflation figure has led to a shift in market expectations. The peak rate forecast has come down to marginally above 6%, indicating a more conservative approach by the BoE. With no significant UK economic data scheduled before the BoE rate announcement, GBP crosses are likely to be influenced by both US and eurozone factors.

Factors Impacting GBP/USD and EUR/GBP Rates

Breaking down the inflation basket, several items remain sticky, including alcohol and tobacco, clothing and footwear, housing and household services, owner-occupiers’ housing costs, and communication. These factors contributed to upward price movements on a year-on-year basis.

However, the most noteworthy aspect was the decline in transport and fuel prices, with fuel prices falling by 22.7% in 2023 (up until June). The transport segment also saw a retraction of 1.7%, indicating a moderation in inflationary pressures.

Price Action and Technical Analysis

Looking at the daily chart for GBP/USD, the immediate selloff in the pound against the US Dollar is evident, with the pair breaking below the 1.3000 psychological handle. The Relative Strength Index (RSI) suggests that the pound is moving out of the overbought zone, indicating potential downside pressure.

For EUR/GBP, the pair rallied after the CPI release and is now trading above the June swing high at 0.8658. While the RSI is approaching the overbought region, there is still room for further upside, possibly around the 0.8700 – 0.8750 resistance zone.

Bearish IG Client Sentiment for GBP/USD

According to IG Client Sentiment Data (IGCS), retail traders are currently net SHORT on GBP/USD, with 67% of traders holding short positions. This could indicate a short-term downside bias for the pair, although traders should consider contrarian views when interpreting such data.

Bullish IG Client Sentiment for EUR/GBP

On the other hand, IG Client Sentiment Data (IGCS) shows that retail traders are net LONG on EUR/GBP, with 62% of traders holding long positions. This data could suggest a short-term upside bias for the pair.

Conclusion

The UK CPI miss had a profound impact on volatile currency pairs like GBP/USD and EUR/GBP. The decline in inflation from 30-year highs eased concerns about runaway inflation and its implications for the BoE’s monetary policy.

Traders should remain cautious in navigating the forex market, as volatile currency pairs are susceptible to swift and unexpected price movements. Staying informed about economic releases and market expectations is crucial for making well-informed trading decisions.

The BoE’s upcoming rate announcement will be a critical event for the GBP pairs, as it may shed light on the central bank’s future policy direction. Traders should closely monitor BoE’s statements and the economic data leading up to the announcement to adapt their trading strategies effectively. Overall, prudent risk management and technical analysis will play a vital role in navigating the turbulent waters of volatile currency pairs.

Click here to read our latest article on The Dollar Decline