GBP/USD Fundamental Backdrop

The UK inflation report this morning beat estimates on almost all metrics (see economic calendar below) with the headline read printing decade highs. According to the Office for National Statistics (ONS), the main contributors to the final inflation statistics were electricity, gas, and food prices in spite of the Energy Price Guarantee. With energy and food costs impacting essential goods, low and middle-income households will be negatively influenced due to a larger portion of their spending going toward essential goods.

GBP/USD Economic Calendar

Source: DailyFX Economic Calendar

Shortly after the CPI report, UK Chancellor Hunt released a statement highlighting the need to make difficult decisions to quell inflationary pressures and assist the Bank of England (BoE) in their assignment. Markets will now look forward to Thursday's Autumn Statement with great anticipation considering the decline in the UK labor market as a result of sickness and immigration. With the winter months and recessionary fears looming, the UK government and BoE have a tough task ahead.

Looking at current money market pricing for the December meeting below, 59bps is shown which does leave room for either a 50bps or 75bps interest rate hike as an option. I tend to favor a 50bps increment under the current circumstance but there are still more data points ahead of the meeting on December 15th.

BOE Interest Rate Probabilities

Source: Refinitiv
 

Technical Analysis

GBP/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Daily GBP/USD price action saw a rejection at the 1.2000 psychological handle yesterday post-U.S. PPI and concerns around Russia potentially bombing Poland (NATO member). This has since presented as a long upper wick exposing a subsequent move lower. The reaction to the UK CPI release has been surprisingly negative for the pound despite a weaker greenback but should reflect more accurately as European markets come online.

Key resistance levels:

• 1.2000

Key support levels:

• 1.1738
• 1.1500
   

Mixed IG Client Sentiment

IG Client Sentiment Data (IGCS) shows retail traders are currently SHORT on GBP/USD, with 54% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we arrive at a cautious bias.

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