BoE Inflation Nod Hampers GBP Recovery

Pound Sterling (GBP/USD, GBP/JPY) Analysis

• Sterling fundamentals muddy the water and BoE officials weigh in on inflation
• GBP/USD attempts to halt the decline, struggles with traction
• GBP/JPY consolidates just short of yearly high as JPY intervention speculation heats up
• Get your hands on the Pound Sterling Q2 outlook today for exclusive insights into key market catalysts that should be on every trader’s radar:

Sterling Fundamentals Muddy the Water and BoE Officials Weigh in on Inflation

Recent UK fundamental data has been fairly mixed, but on balance, rate cuts are still on track for this year. The Bank of England (BoE) has forecasted that inflation will drop sharply in the first half of this year, reaching the 2% target by mid-year. UK CPI this week continued to show progress for both headline and core CPI measures despite missing consensus estimates.

Earlier in the week average wage data proved stubborn and this is something the BoE is looking at closely, along with services inflation. The BoE has also been quick to point out that wage growth remains hotter in the UK than in the US and the EU when questioned about the timing of rate cuts. Stubborn wage growth and services sector inflation can support the pound at it implies interest rates need to remain higher for longer to see these pockets of inflation head lower.

Yesterday, BoE Governor Andrew Bailey admitted there has been some loosening in the labour market and expects next month’s inflation number to reveal a strong drop. In addition, Monetary Policy Committee (MPC) member Megan Greene commented on progress made regarding inflation and that the ‘last mile’ will be difficult. Broader disinflation and a weaker labour market are scenarios that could weigh on sterling.

All of these contrasting fundamental inputs aren’t helping the pound, especially at a time when the US dollar remains strong.

GBP/USD Attempts to Halt the Decline, Struggles with Traction

Cable has dropped massively since that hot US CPI print but has consolidated below the 1.2500 psychological level. Again today, price action attempted to tag the 1.2500 level but subsequently pulled away.

The US Dollar Basket (DXY) revealed a lower move yesterday and is slightly higher today – keeping the pound at arms length.

Failing to break above 1.2500 keeps the bearish bias alive, with a further sell-off eying a move towards 1.2200 which is a significant distance away from current levels. A close and hold above 1.2500 opens up the possibility of a deeper pullback towards the 200-day simple moving average. For now, the high-flying USD is likely to weigh on the weaker sterling.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

GBP/JPY Consolidates Just Short of the Yearly High as JPY Intervention Speculation Heats up

GBP/JPY has consolidated just short of the yearly high of 193.50 as yen FX intervention speculation shifted up a gear. Trilateral talks between US, Japanese and South Korean finance heads underscore the seriousness with which Japan is considering actions to strengthen the yen.

As can be expected, markets appear nervous to push higher in the event Japanese authorities do act. Despite USD/JPY being the problematic currency pair, sterling is likely to feel some knock-on effects too.

193.50 remains the ceiling, while 191.30 provides the immediate level of support, followed by the dynamic support provided by the 50 SMA

GBP/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX