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Will U.K. Inflation Justify an Aggressive BoE Rate Hike Path?

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And once again it has been a relatively quiet trading day in the Forex market while elsewhere, indices like the S&P500 and Nasdaq, as well as Bitcoin are closing in on record highs. Beyond the disparity in risk appetite across assets, it could be difficult to justify all record highs. The driver for Bitcoin was the launch of the Bitcoin future-based ETF, BITO which was one of the biggest ETF launches on record. Cryptocurrency appetite could thus persist if BITO draws in more capital within the next days.

The U.S. dollar fell amid bets other central banks will raise interest rates before the Federal Reserve. The British pound rose above 1.38 as market participants shifted expectations for a first Bank of England rate hike to as early as December, which is very aggressive.

This morning we will have U.K. inflation data due for release which will have an impact on the pound sterling.

GBP/USD: Above 1.3860 we will anticipate higher targets at around 1.39. A short-term support could however come in at 1.3650.

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Inflation is Here to Stay

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Welcome to a new trading week.

Wall Street analysts say inflation is not transitory, it’s permanent. The sentiment that inflation is not transitory is also echoed by Mohammed El-Erian, the chief economic advisor at Allianz SE, who said elevated inflation and supply-chain bottlenecks are only partly rooted in transitory reasons. He predicted “another year at least of high and persistent inflation.”

With this in mind, the Federal Reserve may have no choice but to pull back on stimulus measures.

The U.S. dollar was firm against the euro but weaker against the British pound.

GBP/USD

The cable extended its advance to a fresh monthly high at 1.3773 on speculation the U.K. Consumer Price Index (due for release on Wednesday) is showing a slowdown in the core rate of inflation. However, a marked slowdown in the U.K. CPI would derail the pound’s recent rally as it provides the Bank of England greater scope to retain its current monetary policy and dampens speculation for an imminent BoE rate hike.

From a technical perspective, chances are in favor of a test of 1.38 and possibly even 1.3850, provided that the pair holds above 1.36. A renewed break below 1.3570 would shift chances in favor of the bears with a lower target seen at 1.3370.

EUR/USD: The euro refrained from a break below 1.1580, at least until this morning. Below 1.1580 we expect the pair to dip towards 1.1550-40. Bulls on the other side will have to wait for a break above 1.1610 to shift the focus to a higher target at 1.1650-60.

DAX

The DAX knew only one direction in recent days: Upwards. The recent break above 15550 could now have paved the way for a test of the 15800-resistance. A break above 15820 could see a renewed test of the crucial 16000-mark. A current support is however seen at around 15300.

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GBP/USD And EUR/USD Vulnerable To Further Losses

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The best performer Tuesday was the U.S. dollar which strengthened against the euro and British pound, providing short traders in both EUR/USD and GBP/USD good profits.

Federal Reserve Chairman Jerome Powell played down the risk that economic growth would spur unwanted inflation in yesterday’s testimony. He noted that policy must remain accommodative for now. Powell and Secretary Janet Yellen will testify together again today in front of the Senate Banking Committee.

GBP/USD: We saw the cable breaking below the lower bound of its recent sideways range and dropping towards 1.37. Now that the pair broke below 1.3750, we anticipate further losses towards 1.3620 and possibly even 1.3570. The area between 1.3870 and 1.39 on the upside could now serve as a lower resistance.

For sterling traders, the focus now turns to U.K. CPI data this morning followed by the PMI report due at 9:30 UTC.

EUR/USD: The pair slid towards 1.1836 but refrained from a sustained break of the March low at 1.1835– at least until now. We expect that losses could be extended towards 1.18 and possibly 1.1770 before we see some rebound. For chances to shift in favor of the bulls we recommend waiting for a break above 1.1920.

DAX: After several days of unprofitable fluctuations, we were finally able to benefit from the index’s volatile swings yesterday. We first booked a profit with the DAX falling towards 14500 while a later buy order towards 14700 has also proved profitable. Remaining between 14670 and 14480 could confirm a bull flag within the DAX’s overall uptrend.

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Sterling Traders Focus On U.K. CPI Data

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Dear Traders,

We have seen a bit of a bearish reversal in EUR/USD Monday with the U.S. dollar recovering against the euro. Although yesterday’s slide in EUR/USD does not automatically mean that there will be a trend reversal, it should be noted that the technical picture may promise more downside momentum to come. If the euro falls below 1.1920 and further 1.1885 we could see a slide towards 1.1830. On the topside, buyers in the EUR/USD would first need to push the pair above 1.2030 in order to focus on higher targets at 1.21 and 1.2170.

The British pound ended the trading day virtually unchanged against the greenback with GBP/USD remaining confined to a narrow trading range between 1.3225 and 1.3160. Traders await the U.K. CPI report, due for release at 8:30 UTC today and if inflation data shows an uptick in August, the Bank of England may feel pressure to turn away from its dovish monetary policy stance. This would be positive for the pound but most volatility is expected on Thursday when the BoE announces its rate decision and outlook on policy.

If the pound rises above 1.3225 we may see a run for 1.3265. We bear in mind that the August high is at 1.3268, so sellers may sweep in to sell pounds around that resistance level. On the downside, we expect a support to be at around 1.3050.

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