• The UK consumer price index rose by a smaller-than-expected 2.2% in July.

• UK service inflation increased by 5.2% in July after a 5.7% increase in the previous month.

• The US PPI increased by 0.1% in July, missing forecasts.

The GBP/USD forecast leans slightly bearish as easing UK consumer inflation data boosts expectations for Bank of England rate cuts. Nevertheless, the larger bullish trend remains intact as the dollar weakens after downbeat US wholesale inflation data. 

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Data on Wednesday revealed that the UK consumer price index rose by 2.2% in July. The value rose above the Bank of England’s 2% target for the first time in two months. Nevertheless, it was a more minor increase than the forecast of 2.3%.

Meanwhile, service inflation increased by 5.2% in July after a 5.7% increase in the previous month. This decline is a significant relief for the BoE. Notably, policymakers have remained cautious due to high service inflation. 

Although headline inflation reached the central bank’s target, few were ready to lower borrowing costs because service inflation was a concern. Therefore, July’s figures might give more policymakers the confidence to continue cutting interest rates. After the CPI report, traders raised the chances of a BoE cut in September to 48%. Meanwhile, they expect 46 bps in total of rate cuts this year. 

On the other hand, the dollar remained fragile after softer-than-expected US wholesale inflation figures. The PPI increased by 0.1% in July, missing forecasts of a 0.2% increase. As a result, investors are pricing a higher chance of a super-sized 50 bps Fed rate cut in September. Later today, the CPI report will further shape the outlook for Fed monetary policy.

GBP/USD key events today

• US Core Consumer Price Index m/m
• US Consumer Price Index m/m
• US Consumer Price Index y/y

GBP/USD technical forecast: Bullish momentum surges with 0.618 Fib in sight

On the technical side, the GBP/USD price has broken above a strong barrier comprising the 0.382 Fib and the 1.2800 key resistance level. As a result, the price has risen far above the 30-SMA to make a new high. Meanwhile, the RSI trades near the overbought region.

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Furthermore, after the rally, bears resurfaced and pushed the price to retest the recently broken barrier. Since the bullish bias remains strong, the next target might be at the 1.2900 level near the 0.618 Fib.

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• A combination of factors assists USD/JPY to attract some dip-buying near the 146.00 mark.
• A positive risk tone undermines the JPY and acts as a tailwind amid a modest USD rebound.
• The upside remains capped as traders keenly await the release of the crucial US CPI report.

The USD/JPY pair reverses an intraday dip to the 146.00 mark, or a fresh weekly low touched earlier this Wednesday and builds on its steady intraday ascent through the early European session. Spot prices, however, remain confined in a familiar range held over the past week or so as traders await more cues about the Federal Reserve’s (Fed) rate-cut path before positioning for a firm near-term direction. Hence, the market focus will remain glued to the release of the closely-watched US Consumer Price Index (CPI) report, due later today, which is expected to infuse some volatility in the markets and provide some meaningful impetus to the currency pair. 

The headline CPI is expected to rise 0.2% MoM in July and at an annual rate of 2.9% in July, down slightly from the 3% in the previous month. Meanwhile, the core CPI, which excludes volatile food and energy prices, is seen ticking lower to 3.2% from 3.3% in June. Against the backdrop of last Friday’s disappointing US jobs report, a softer-than-expected US CPI print will lift bets for a 50 basis points (bps) interest rate cut at the September FOMC policy meeting. This might prompt fresh selling around the USD, which dropped to over a one-week low on Wednesday in reaction to a weaker US Producer Price Index (PPI) report, and drag the USD/JPY pair lower. 

Ahead of the high-impact macro data, some repositioning trade assists the USD Index (DXY), which tracks the Greenback against a basket of currencies, to regain some positive traction and reverse a part of the previous day’s losses. Furthermore, a generally positive tone around the equity markets, along with diminishing odds of the Bank of Japan (BoJ) hiking interest rates again this year, undermines the safe-haven Japanese Yen (JPY) and lends support to the USD/JPY pair. BoJ Deputy Governor Shinichi Uchida said last week that the central bank won’t hike rates when markets are unstable. Apart from this, geopolitical risks should limit losses for the JPY. 

Meanwhile, investors remain worried about the risk of a further escalation of geopolitical tensions in the Middle East. This could keep a lid on any optimism in the market and further contribute to limiting the downside for the JPY. Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the USD/JPY pair’s recent goodish recovery from the 141.70-14.65 area, or the lowest level since early January touched last week. 

Technical Outlook

From a technical perspective, the USD/JPY pair seems to have found acceptance above the 23.6% Fibonacci retracement level of the recent steep decline from a multi-decade high. This, along with the emergence of some dip-buying on Wednesday, supports prospects for some near-term appreciating move. That said, it will be prudent to wait for a breakout through a short-term trading range resistance, around the 147.80 area, before placing fresh bullish bets. Spot prices might then accelerate move beyond the 148.00 mark and the weekly swing high, around the 148.20 region, towards reclaiming the 149.00 mark. The momentum could extend further towards the 38.2% Fibo. level, around the 149.30 zone.

Meanwhile, oscillators on the daily chart are holding deep in negative territory and also seem to have recovered from the oversold zone. This, in turn, suggests that any meaningful recovery attempt is more likely to attract fresh sellers and remain capped. In the meantime, the Asian session low, around the 146.00 mark, now seems to protect the immediate downside ahead of the 145.50-145.45 region. Some follow-through selling has the potential to drag the USD/JPY pair below the 145.00 psychological mark, towards testing the next relevant support near the 144.20-144.15 horizontal zone. The latter should act as a key pivotal point, which if broken decisively will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.

• I recognize that this asset is testing the crucial 200-Day EMA, which of course a lot of people will pay close attention to, as it is one of the most widely followed technical indicators out there.
• With this being the case, I think you get a situation where buyers could step back into the market, and we have already seen that during the early hours on Tuesday, they have at least tried to defend that moving averages.

Recent Breakout

The recent breakout was rather brutal, and now it looks as if we are questioning whether or not there is going to be a continuation of the upward pressure. I think given enough time, the EUR/GBP pair almost certainly will see an attempt to go higher, but right now we’ve got a situation where a lot of people are looking at this through the prism of whether or not we can bounce hard enough to reach toward the 0.86 level again. That’s an area that previously had been resistant, so it’s not a huge surprise to see that the market has caused a bit in that general vicinity for short-term pullback.

At this point in time, I look at the 0.85 level underneath as support as well, especially as the 50-Day EMA is starting to race toward that level. It’s also worth noting that the 0.84 level previously had been a massive support level on the monthly chart, so it’s not a huge surprise to see that we had bounce from there. In general, this is a market that I think continues to be very noisy, but that’s not a huge surprise considering that the two economies are so highly interlinked.

On a break above the recent highs of the last week, then I think this is a pair that probably goes looking to the 0.8750 level, but it’s also a situation where the market is going to continue to be very noisy and choppy, so with that being said, the market is one that you will have to be very patient with as the moves tend to take quite a bit of time, generally speaking.

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GBP/USD Forecast: Pound Sterling needs to clear 1.2810-1.2820 to stretch higher

GBP/USD gained traction in the early European session on Tuesday and climbed above 1.2800 for the first time in a week. The pair could stretch higher if it manages to clear the resistance area located at 1.2810-1.2820.

The UK’s Office for national Statistics reported on Tuesday that the ILO Unemployment Rate declined to 4.2% in the three months to June from 4.4%. This reading came in below the market expectation of 4.5%. Additionally, the annual wage inflation, as measured by the change in the Average Earnings Excluding Bonus, edged lower to 5.4% in the same period from 5.7%, coming in above analysts’ estimate of 4.6%. With the immediate reaction, Pound Sterling gathered strength against its major rivals. Read more…

Pound Sterling climbs above 1.2800 as UK Unemployment rate unexpectedly falls

The Pound Sterling (GBP) delivers a sharp upside move against its major peers in Tuesday’s London session. The British currency strengthens as the United Kingdom (UK) Office for National Statistics (ONS) reported upbeat labor market data for the three months ending in June, which has weighed on market expectations of subsequent interest-rate cuts by the Bank of England (BoE).

The agency reported that the ILO Unemployment Rate unexpectedly declined to 4.2%. Economists expected the jobless rate to have increased to 4.5% from the prior release of 4.4%. Read more…

“They won’t be able to hike again, at least for the rest of the year. It’s a toss-up whether they can do one hike by next March.”

The July Rate Hike and Market Mayhem

On July 31, the Bank of Japan unexpectedly raised interest rates to around 0.25% while announcing the anticipated cut to Japanese Government Bond (JGB) purchases (quantitative tightening). Significantly, the BoJ Governor hinted at further rate hikes and a neutral interest rate of around 1%. The monetary policy decision and forward guidance contributed to the Yen rally and the Nikkei 225’s brief collapse.

Is the Yen Carry Trade Unwind Over?

Economists have warned that the Yen carry trade unwind may not be over, exposing the USD/JPY and the global markets to more volatility.

On August 8, the Kobeissi Letter, an industry-leading commentary on global capital markets, stated that Deutsche Bank put the Yen carry trade at $20 trillion.

With US inflation and labor market data due this week, the data could signal a further narrowing of the interest rate differential between the US and Japan, possibly triggering another Yen carry trade unwind.

Goldman Sachs Private Wealth Management Investment Strategy Managing Director Matheus Dibo commented on market conditions, stating,

“Volatility could remain elevated for quite a while. We have some key data points this week. We were talking about earlier, retail sales CPI, Jackson Hole next week, so a lot of things that could move markets over the next few days.”

ARK Invest Founder, CEO, and CIO Cathie Wood recently commented on Treasury yields and the Fed Funds Rate, stating,

“The metal-to-gold ratio suggests that the 10-year Treasury bond yield should be around 2% today, not where it is at 3.8% or last October’s 5%. If the 10-year Treasury should yield ~2% today, should the Fed funds rate be closer to 1%?”

The Bank of Japan’s Summary of Opinions revealed an intention to return the policy interest rate to a neutral rate of 1% over time.

If interest rate differentials matter, the outlook is bearish for the USD/JPY, even if the BoJ keeps interest rates on hold.

US Economic Calendar

On Wednesday, August 14, the heavily anticipated US CPI Report will be in focus.

Economists expect the core annual inflation rate to drop from 3.3% year-on-year in June to 3.2% in July.

Softer-than-expected numbers could fuel speculation about a possible 50 basis point September Fed rate cut and multiple 25 basis point cuts in November and December.

A softer CPI Report could allow the Fed to focus on the waning US labor market. Deteriorating labor market conditions could lead to further cuts in Q1 2025.