GBP/USD – Pound Jumps on Strong CPI, May Speech on Brexit Next

The British pound has started the Tuesday session with strong gains. In the European session, GBP/USD is trading at 1.2180. On the release front, CPI surged 1.6%, beating the estimate of 1.4%. The markets are keeping a close eye on a crucial speech from Prime Minister Theresa May, who is expected to confirm that the Britain will leave the European Union’s single market. The US will release the Empire State Manufacturing Index, with the indicator expected to dip to 8.1 points.

British inflation indicators continue to point upwards. CPI, the primary gauge of consumer inflation, climbed 1.6%, its highest level since July 2014. On Monday, BoE Governor Mark Carney said that higher inflation the country is experiencing will take a toll on wages and consumer spending. Carney didn’t shed any light on future monetary policy, saying that interest rates could move in either direction in the months ahead. Still, the BoE will want to keep a lid on inflation and could raise rates in order to do so. The bank has projected an inflation rate of 2.7% in 2017, but some experts are forecasting inflation levels closer to 4 percent.

Anxious investors are bracing for Prime Minister May’s speech later on Tuesday, in which she will provide more details on the government’s Brexit strategy. May is expected to announce that Britain will assume control over its  borders and immigration policy, while acknowledging that this will mean an end to Britain’s access to the EU’s single market. She will likely reiterate that Britain is not looking for a “half-in, half out” relationship with the EU, but what new arrangement will be put into place remains unclear. Since the Brexit vote in June, European leaders have argued that Britain cannot have access to the single market without allowing freedom of movement, essentially saying that the Brits cannot have their cake and eat it too. With May’s speech likely to signal a “hard Brexit”, we could see the pound lose ground following the speech.

With the US economy on track and the country celebrating a new president, the US consumer remains very optimistic. The UoM Consumer Sentiment in January was solid, although the markets had expected a stronger performance. The indicator was almost unchanged at 98.1, shy of the forecast of 98.6. Despite the optimism, US retail sales were a mix during the December holiday season. Retail Sales improved to 0.6%, edging above the estimate of 0.5%. However, much of the increase in spending was attributable to automobile sales, at the expense of other sectors of the economy. This was reflected in Core Retail Sales (which excludes car sales), which remained stuck at 0.2%, compared to a forecast of 0.5%. Still, analysts are confident that a bullish consumer will translate into strong spending numbers in the next few months. There was good news on the inflation front, as wholesale prices (measured by PPI) rose 0.3%, beating the forecast of 0.1%. This marked the third rise in four months, as inflation is pointing upwards due to higher oil prices. If inflation continues to climb towards the Federal Reserve target of 2.0%, we could see the Fed step in and raise interest rates. Last week, FOMC member Patrick Harker took note of the strong US economy and projected three “modest” rates from the Fed in 2017.  We’ll get another look at US inflation numbers on Wednesday, with the release of CPI and Core CPI.

Post Pound Pounding

May to Detail Out 12 Point Brexit Plan

GBP/USD Fundamentals

Tuesday (January 17)

• 4:30 British CPI. Estimate 1.4%. Actual 1.6%
• 4:30 British PPI Input. Estimate 2.2%. Actual 1.8%
• 4:30 British RPI. Estimate 2.3%. Actual 2.5%
• 4:30 British Core CPI. Estimate 1.4%. Actual 1.6%
• 4:30 British HPI. Estimate 6.3%. Actual 6.7%
•  6:45 Prime Minister Theresa May Speech
• 8:30 US Empire State Manufacturing Index. Estimate 8.1
• 8:45 US FOMC Member William Dudley Speaks
• 9:30 US CB Leading Index
• 10:00 US Treasury Secretary Jack Lew Speaks
• 10:00 US FOMC Member Lael Brainard Speaks

*All release times are EST

* Key events are in bold

GBP/USD for Tuesday, January 17, 2017

GBP/USD January 17 at 12:15 EST

Open: 1.2039 High: 1.2189 Low: 1.2037 Close: 1.2164

GBP/USD Technical

• GBP/USD has posted gains in the Asian and European sessions
• 1.2111 has switched to a  support role following strong gains by GBP/USD
• 1.2272 is the next resistance line

Further levels in both directions:

• Below: 1.2111, 1.1943, 1.1844 and 1.1559
• Above: 1.2272, 1.2351 and 1.2471
• Current range: 1.2111 to 1.2272

OANDA’s Open Positions Ratio

GBP/USD ratio is showing gains in short positions in the Tuesday session. This is consistent with the strong gains from GBP/USD. Currently, long positions have a majority (64%), indicative of trader bias towards GBP/USD continuing to move upwards.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.