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Cable bounce could be short lived

Sterling has been in focus this week as a raft of releases hit the wires.

Cable
Source: Bloomberg

Yesterday’s data showed inflation fell short of expectations, with CPI coming in at 1% versus expectations of 1.2%. Predictably, the oil price slump has had an impact on inflation as it hit the lowest level since 2002.

BoE Governor Mark Carney piled on pressure by saying he expects headline inflation to fall below 1% in coming months. However, gilts rallied, presumably helped by a positive outcome from the financial stability report.

This underpinned the sterling and saw cable drift higher. GBP/USD is now back above $1.5700 and currently testing a downtrend resistance which has been in place since July. This line currently comes in at $1.5720 and appears to have been broken.

While cable closed above this level, there is significant event risk coming up with the Federal Reserve meeting the highlight. Any signs of a hawkish shift could see USD strength resume. In the UK we have minutes from the last central bank meeting along with unemployment and wage data.

This makes a fairly enticing session for the sterling with volatility likely. While yesterday’s price action was quite positive, I still feel GBP/USD is at risk of being sold, which would result in a potential move to the bottom end of the range below $1.5600.

GBP/USD
Click to enlarge

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