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Mid-Week Watchlist: UK & US CPI Releases

Following the announcement of the US CPI y/y – GBP, all eyes will be on the CPI y/y – GBP. The headline CPI print was 8.3% year on year, compared to a forecast of 8.1% year on year and a July reading of 8.2% year on year. 

Nonetheless, the Core CPI print for August was 6.3% year on year, compared to a forecast of 6.1% year on year and a prior reading of 5.9% year on year.

Following the announcement of the report, the US Dollar surged higher, causing the GBP/USD to fall roughly 150 pips to 1.1530. Can the UK see a similar problem tomorrow when it announces its own August CPI data?

The headline figure is likely to be 10.2% year on year, up from 10.1% in July. Furthermore, the Core CPI is predicted to be 6.3% YoY, up from 6.2% YoY in July. 

The reading in August was the highest since February 1982! However, the Bank of England has already stated that it expects CPI to hit 13% in October and that the UK economy will enter a recession in Q4. 

As a result, unlike in the US, where the Fed does not forecast a recession, higher CPI readings should not have as much of an impact on the GBP or the FTSE, because markets have already priced in an element of higher inflation and poorer growth.

This is one of the reasons why the GBP/USD has been so weak in the last year. GBP/USD only recently fell below the psychological round number support level of 1.3000 on April 22nd. 

GBP/USD has been going downward in an order channel since then. 

GBP/USD dropped 4 pips below the March 2020 lows to 1.1405, a new 25-year low, on September 7th. It was also supported by the channel’s bottom trendline and the 161.8% Fibonacci extension from the lows on July 14th to the highs on August 1st. 

The RSI was oversold, and the price recovered off the July 14th bottom, at 1.1760.

However, following yesterday’s CPI data, GBP/USD formed a bearish engulfing candle on the daily timeframe, indicating that additional selling is likely!

Since August 10th, GBP/USD has been going lower in a tighter channel pattern on a 240-minute period. On September 12th, the pair broke out above the channel’s top trend – line and trade to the previously indicated horizontal resistance.

Following the release of US CPI data, GBP/USD fell back into the channel yesterday. The pair’s first support is at the lows of September 7th, at 1.1405.

Price might fall below the 127.2% Fibonacci extension from the September 7th low to the September 12th highs at 1.1314. This level also intersects with the lengthier channel’s bottom trendline.

The third level of assistance is at 1.1250, along the bottom trendline of the shorter-term channel. If prices reversal and go upward, the first intraday barrier is around 1.1663, followed by yesterday’s high and horizontal resistance at about 1.1740. 

Above that level, GBP/USD might reach August 22nd highs of 1.1901.

Today is the publication of the August CPI in the United Kingdom. A headline print of 10.1% year on year is expected, with a Core CPI print of 6.4% year on year.

Will the GBP/USD rise if the data is greater than expected? It may, but not to the level that the US Dollar did following the higher US CPI. 

The BOE, which is anticipated to raise interest rates by 75 basis points next week, has already warned investors of a possible 13% CPI figure in October and the start of a recession in Q4. 

As a result, markets have priced in a possibly higher inflation reading since the last BOE meeting (yet the GBP/USD is still significantly lower!).

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  • Phyllis Wangui

    Phyllis Wangui is a Financial Analyst and News Editor with qualifications in accounting and economics. She has over 20 years of banking and accounting experience, during which she has gained extensive knowledge of the forex, stock news, stock market, forex analysis, cryptos and foreign exchange industries. Phyllis is an avid commentator on these topics and loves to share her insights with others through financial publications and social media platforms.


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