Despite worse-than-expected inflation data from the UK, GBPUSD still managed to finish yesterday’s trading in the green. The currency fell to an intraday low of 1.2984 after initially trading at 1.3041 when the CPI reading for December printed at 1.3%. This figure was below the forecast at 1.5% and, more importantly, marks a three-year low for British inflation. The core CPI reading, which excludes volatile items, also missed the 1.7% consensus when it came in at 1.4%. However, GBPUSD was quick to recover its losses and steadily traded higher to close the day at 1.3036, up by 21 pips from its opening price.
According to the Office for National Statistics, the drop in consumer prices was weighed down by a fall in hotel rates and women’s clothing.
Lower inflation figures tend to have a bearish effect on currencies as they give central banks leeway to ease monetary policy. The most recent report from the UK is particularly important because some members of the Bank of England (BOE) have expressed their intent to vote for rate cuts in their upcoming meetings. The fall from November’s reading of 1.5% has taken the BOE further away from its 2% inflation target. Because of this, there are speculations that we may see a rate cut as early as this month.
On the hourly time frame, we can see that GBPUSD has broken through resistance at the falling trend line (from connecting the highs of December 31, January 7, January 8, and January 15). If there are enough buyers in the market to push prices above the 200 SMA around 1.3070, we may even see a rally to the pair’s January 10 highs around 1.3100.
However, be warned that the recent price action on GBPUSD seems to have formed a rising wedge. This chart pattern is characterized by an upward slowing consolidation with the range getting narrower as prices climb higher. The rising wedge is considered as a bearish indicator. A candlestick closing at 1.3015 would constitute a downside break. It may also hint that GBPUSD could drop to its January 13 lows at 1.2960.