Cable bounce could be short lived

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

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.

Click to enlarge

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.

Find articles by analysts