GBP/USD – BoE a coin toss after surprisingly encouraging inflation report

• UK CPI 6.7% in August (7.1% expected, 6.8% in July)
• UK Core CPI 6.2% in August (6.8% expected, 6.9% in July)
• GBPUSD sees strong support near 1.23

Everyone at the Bank of England undoubtedly breathed a collective sigh of relief this morning, joining the rest of us, as inflation subsided much more than expected in August.

Not only did the headline CPI rate not rise last month, as was expected, it actually fell slightly, with the core rate falling a lot. So despite the unfavorable base effects for fuel, which many expected would lift the headline rate, price increases are finally easing at a decent rate.

There is obviously still a long way to go and further substantial progress will likely be made in the final months of the year but there are also upside risks, most notably oil prices. That said, the situation in the oil market is very different from the last couple of years so there isn’t necessarily cause for panic on that front, it may just complicate things on the way back to the Bank’s 2% target.

There is plenty more to celebrate in the breakdown of the data though, most notably the drop in services inflation which has been a major concern for the MPC amid soaring wages. But with inflation falling, energy prices declining and the labor market tightness easing, there is hope that pressures here will further subside too.

What’s interesting is that markets now view tomorrow’s BoE interest rate decision as a coin toss between 25 basis points and hold. Perhaps the MPC’s words from earlier this month in front of the Treasury Select Committee are still ringing in traders ears but given the entirety of the data, I think we’re more likely to see an ECB-style dovish hike tomorrow than a Fed-style stuttered exit.

Holds around major support after UK inflation release

The pound took a dip against the dollar after the CPI release but has since rebounded over the course of the day.

GBPUSD Daily

Source – OANDA on Trading View

The sell-off had already stalled in recent days and despite today’s release, it’s failed to significantly break this seemingly important area of support.

The 200/233-day simple moving average has combined with the 61.8 Fibonacci retracement level to create a substantial barrier to the downside.

A move below here could be a very bearish move. Perhaps the Fed’s decision later contributed to the failure to break, it will be interesting to see whether a hawkish outcome may change that.

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