GBP/USD Daily Forecast – Sterling Declines on Inflation Miss

GBP/USD Pares Recent Gains After CPI Miss

GBP/USD once again traded above the important 1.2500 level in early trading but failed to sustain above the level. Data out of the UK has caused a bit of a sell off at the European open and GBP/USD has given up yesterday’s gain as a result.

Annual inflation data in the United Kingdom showed price pressures weakening in the year to August. The consumer price index was reported to rise 1.7% annually, significantly lower from the prior reading of 2.1% and below the analyst estimate of 1.8%. Core CPI came in at 1.5%, well short of the expected 1.8%.

The Office for National Statistics reported increases in airfares to be the largest contributor to upward price pressure. Meanwhile, price decreases in a range of recreational and cultural goods and services weighed on the index.

Juncker Says a No-Deal Brexit Remains on the Table

European Commission President Jean-Claude Juncker said on Wednesday that the threat of a no-deal Brexit is very real. Juncker met with UK Prime Minister Boris Johnson earlier this week to have preliminary Brexit discussions ahead of the EU summit next month.

A law was passed in the UK earlier this month that prevents an exit without a deal. This did not seem to stop Johnson who stuck with his script, telling Juncker the UK would leave on October 31 even without a deal.

Juncker is urging the British PM to come up with alternatives to the Irish backstop which is the main point both parties can’t seem to agree on.

Later today, the Federal Reserve will meet and they are expected to cut rates by a quarter basis point. GBP/USD is likely to see a volatile reaction as a result of the meeting.

Technical Analysis

GBP/USD has not been rejected from overhead resistance near 1.2500 twice. It is a critical resistance area. Not only does it contain the psychological 1.2500 handle, the 20-week and 100-day moving averages are also in play.

Ahead of the Fed meeting, I expect support at 1.2426 to hold buyers. It was an important resistance level yesterday, and after crossing it, the exchange rate propelled to multi-week highs.

To the upside, resistance for the session falls at 1.2486.

Bottom Line

• GBP/USD is under a bit of pressure after UK inflation data fell short of expectations.
• I expect the pair will hold within yesterday’s range ahead of the Fed meeting.
• The Fed is expected to cut rates by a quarter basis point today.