GBP/USD treads water ahead of CPI figures

Despite the respite both GBP/USD and EUR/USD remain oversold as the markets await the UK inflation figures.

50 euro note
Source: Bloomberg

GBP/USD below 50-DMA

At 9.30am (London time) we will see the latest UK inflation figures with the release of the consumer price index and the retail price index. Having seen the CPI come in at 1% last month, Bank of England governor Mark Carney will have already prepped his letter to the chancellor George Osborne. The expectations are for a figure of 0.7% figure, and as it is more than 1% away from the targeted 2% it will require a letter of explanation.

With both ASDA and Tesco announcing renewed price cuts and the collapse of oil, this will come as no real surprise to market watchers.

As GBP/USD sits below $1.52 it still remains below the 50-day moving average by some 400 pips, and the divergence from the 200-DMA is now 1,150 pips. The relative strength index confirms that GBP/USD is still oversold but there have been precious few triggers to warrant a change in sentiment. It is unlikely today’s UK inflation figures will change that trend.

EUR/USD sees mild bounce

Yesterday and today have seen little economic data releases relating to the eurozone, and the scarcity of bad news has helped deliver a mild bounce in EUR/USD. Currently, it is just holding above the $1.18 region, but with a number of institutional notes in the last month outlining expectations of a 1:1 rate between the euro and the dollar, this could simply be the quiet before the storm.

Today’s UK inflation figures could give an indication as to how badly the current squeeze in oil is affecting inflation and an indicator of what Fridays eurozone inflation figures might bring. Events in France over the week have seen worries about the looming Greek elections being pushed into the background, but as we are now two weeks away this is unlikely to remain the case.

Uncertainty brings volatility and the Greek elections are far from clear cut. This extra dimension of risk could trigger fresh pressure on the EUR/USD as traders worry about the unity in Europe. In contrast to this, rumours have swirled that the European Central Bank will action a €500 billion QE strategy. Markets have at least partially factored this in, with a start date around the next ECB meeting on Thursday 22 January. This may or may not happen, but EUR/USD should jump on the back of that meeting.

The breaches below the $1.18 level have so far seen buyers creep back in but their resilience is far from certain, and a return to the bearish trend remains the most readable move. 

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