GBP/USD Rises After UK Inflation Ahead of FOMC Minutes
GBP/USD is rising on Wednesday following the release of UK inflation data and ahead of the July FOMC minutes.
Data from the Office for National Statistics showed that UK inflation accelerated in line with expectations last month. July CPI rose 0.3% month-on-month and 2.9% year-on-year, up from 0.1% and 2.6% respectively in June.
This marked a four-month high, reflecting the 13% rise in the price cap that sets household energy bills, which was only partly offset by cheaper motor fuel.
Services inflation, a gauge closely watched by the Bank of England and a sign of domestic price pressures, fell to 3.4% from 3.6%. Core CPI remained unchanged at 2.6%, defying expectations of a decline to 2.5%.
The rise in headline inflation was largely expected, reflecting the impact of higher household energy costs. The broader inflation outlook remains complicated by the Middle East conflict, which continues to put upward pressure on oil, energy and fertiliser prices.
The data leaves the possibility of another rate hike on the table this year. However, the ongoing softening in the labour market and a tepid domestic economy could limit the extent to which higher energy prices feed into broader inflation.
This is an important difference from 2022, when higher energy prices fed into much broader cost increases across the economy and could limit the upside in GBP.
Meanwhile, the U.S. dollar is falling as Treasury yields ease from recent highs and markets turn their attention to the release of the July FOMC minutes at 18:00 GMT.
The minutes come as markets have recently reduced expectations of a Federal Reserve rate hike following weaker U.S. labour market data and subdued inflation readings.
With Federal Reserve Chair Kevin Warsh having provided limited forward guidance, the minutes could offer some clues over how policymakers are assessing the inflation outlook and the recent rise in long-term Treasury yields.
GBP/USD Forecast – Technical Analysis
GBP/USD has extended its recovery from the 1.32 support zone and is attempting to retake 1.3550.
The pair continues to trade within a rising channel and has moved above the multi-month falling trend line dating back to the start of the year. Combined with an RSI above 50, this keeps buyers hopeful of further gains.
Buyers will look to break and hold above 1.3550 to bring 1.36 into focus, followed by 1.3650, the May high. Above here, attention could turn towards 1.38.
Immediate support is seen around 1.3480, where falling trend line and horizontal support converge.
Below here, the 200 EMA comes into focus around 1.34. A break below this level could see sellers gain traction towards 1.3330 horizontal support.
DAX Rises as Global Bond Sell-Off Eases
The DAX is rising on Wednesday, recovering from a sharp sell-off that sent the index to a two-week low, as the global bond sell-off starts to ease.
European stocks are still nursing heavy losses from Tuesday's retreat, when escalating Middle East tensions, surging oil prices and multi-decade highs in government borrowing costs triggered a sharp move out of risk assets.
Germany's 10-year bond yield rose to its highest level since May 2011, the time of the European debt crisis, while the U.S. 30-year Treasury yield moved above 5.3%, reaching a 19-year high.
Higher risk-free yields make equities less attractive relative to bonds, while higher discount rates can put particular pressure on high-growth sectors such as technology and software.
The sell-off has eased today, although oil prices continue to rise towards three-week highs as commercial shipping through the Strait of Hormuz remains severely disrupted, with little sign of an immediate resolution.
The combination of higher energy prices and rising bond yields has forced markets to reassess the outlook for central banks. Markets are now fully pricing in a 25 basis point ECB rate hike at the September meeting.
Looking ahead, comments from ECB President Christine Lagarde will be scrutinised for clues over how the central bank intends to navigate the increasingly difficult combination of weaker growth and higher inflation.
In the U.S., the release of the July FOMC minutes will also be in focus. Markets will look for clues over how closely policymakers are monitoring the cooling labour market, sticky inflation and the recent rise in long-term borrowing costs.
DAX Forecast – Technical Analysis
The DAX remains above its rising trend line, 200 EMA and 50 EMA, keeping the broader trend bullish.
The index ran into resistance at the record high of 26,580 and has since eased lower. For now, the pullback remains within the boundaries of a normal retracement inside the broader uptrend.
A deeper decline could bring support around 25,900, the July high, into focus, followed by 25,500, where the 50 EMA is located.
On the upside, buyers will look to reclaim 26,500, the round number, followed by 26,580.
A break above the record high would create a fresh higher high and open the door to 27,000.
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