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GBP remains little changed despite CPI above forecast

Summary:

  • UK’s inflation surprised to the upside in May
  • Higher inflation and sluggish pace of growth could create a stagflation risk
  • GBPUSD could be considered one of the most interesting trade idea just ahead of the FED’s meeting

May’s inflation figures from the UK’s economy proved to be much higher than estimated, however, despite such upside surprises the GBP has not appreciated substantially as of yet. CPI in an annual basis came in at 2.9% while a 2.7% reading has been anticipated. In turn, core CPI in the same basis showed a pick-up by 2.6% in comparison to 2.7% estimated. 

These figures look pretty powerfully. It’s worth mentioning that most of strength of the inflation trend in the UK comes from the weak pound following the pass-through effect has kicked in. Usually, the higher inflation, the stronger currency, in case of the UK’s things are different though. 

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 The UK’s inflation trend has been increasing for a few months while GDP in quarterly terms has lagged behind. That mix could create risks of a stagflation scenario. Source: Bloomberg

 Given inflation has been keeping to rise quite substantially in the past months and really sluggish pace of economic growth one could worry about a possible stagflation risk. That’s the worst scenario for each central bank as it remains stuck and cannot neither increase nor decrease interest rates (having assumed it pursues to get GDP growth and inflation metrics at appropriate levels at the same time). If that scenario realized that could be a potential big drag on the GBP as the currency remains under severe political pressure. 

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 Inflation expectations measured by the 5y5y inflation SWAP in the UK have subsided of late, a move that could eventually stem further gains in inflation gauges. Source: Bloomberg

On the other hand, inflation expectations have worn off recently and if that move continues it could potentially limit further increases in CPI. However, needless to say, any more meaningful declines in inflation expectations seem to be restricted as an impact stemming from the weak pound could still weigh on. 

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The GBPUSD could be considered one of the most interesting trade idea just ahead of the FED’s meeting as the pair is closing to a crucial resistance zone. Source: xStation5

From a technical point of view the cable looks pretty encouragingly when it comes to a continuation of its downward trend. If the pair tests the resistance zone located at around 1.2770 and then some bearish candlestick occurs, that could be quite an interesting trade idea given the risk/reward ratio. In case of a reversal of a current corrective move bears could eye 1.26 as their potential target.

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