GBP/USD – British Pound Drops to 2018 Low as Inflation Heads Lower

The British pound has posted considerable losses on the Wednesday session. In North American trade, GBP/USD is trading at 1.3356, down 0.57% on the day. Earlier in the day, the pair touched a low of 1.3305, its lowest level since December. On the release front, British CPI continued to fall, coming in at 2.4%. This was shy of the estimate of 2.5%. Over in the US, New Home Sales dropped to 662 thousand, well off the estimate of 680 thousand. Later in the day, the Federal Reserve releases the minutes from the May policy meeting. On Thursday, the UK releases Retail Sales and the US will publish unemployment claims and Existing Home Sales.

Just a few weeks ago, there was a strong likelihood that the Bank of England would raise interest rates at the May policy meeting. However, a spate of weak economic releases and falling inflation resulted in policymakers standing pat, leaving rates at 0.50%. Are we in for a repeat performance in August? Inflation levels continue to drop, with April CPI falling to 2.4%, down from 2.5% a month earlier. The markets are eyeing two key indicators later in the week – Retail Sales and Second Estimate GDP. If these releases miss expectations, an August rate hike will be in serious doubt. Earlier in the week, the markets priced in an August hike at 50%, but this dropped to just 33% after Wednesday’s weak inflation data. The pound is also under pressure, and the downward spiral is likely to continue if this week’s indicators do not perform well.

On Tuesday, Bank of England Governor Mark Carney testified before a parliamentary committee. Carney acknowledged that growth in the first quarter was weak, blaming “temporary and idiosyncratic factors”, such as massive snowstorms which hampered economic growth. The BoE has forecast growth in Q1 of just 0.4%. As for monetary policy, Carney was subtle, saying that “interest rates are more likely to go up than not, but at a gentle rate”. The markets clearly have their doubts about a rate hike in August, as Wednesday saw the pound fall and the likelihood of an August rate hike drop, following another drop in inflation.

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GBP/USD Fundamentals

Wednesday (May 23)

• 4:30 British CPI. Estimate 2.5%. Actual 2.4%
• 4:30 British PPI Input. Estimate 1.0%. Actual 0.4%
• 4:30 British RPI. Estimate 3.4%. Actual 3.4%
• 4:30 British Core CPI. Estimate 2.2%. Actual 2.1%
• 4:30 British HPI. Estimate 4.4%. Actual 4.2%
• 4:30 British PPI Output. Estimate 0.3%. Actual 0.3%
• 6:00 British CBI Realized Sales. Estimate 4. Actual 11
• 9:45 US Flash Manufacturing PMI. Estimate 56.6. Actual 56.6
• 9:45 US Flash Services PMI. Estimate 54.9. Actual 55.7
• 10:00 US New Home Sales. Estimate 680K. Actual 662K
• 10:30 US Crude Oil Inventories. Estimate -2.5M. Actual
• 14:00 US FOMC Meeting Minutes

Thursday (May 24)

• 4:00 BOE Governor Mark Carney Speaks
• 4:30 British Retail Sales. Estimate 0.8%
• 8:30 US Unemployment Claims. Estimate 220K
• 10:00 US Existing Home Sales. Estimate 5.56M

*All release times are DST

*Key events are in bold

GBP/USD for Wednesday, May 23, 2018

GBP/USD May 23 at 10:35 DST

Open: 1.3432 High: 1.3442 Low: 1.3305 Close: 1.3356

GBP/USD Technical

GBP/USD ticked lower in the Asian session. The pair posted considerable losses in European trade and has inched higher in the North American session

• 1.3301 is providing support
• 1.3402 is the next resistance line
• Current range: 1.3301 to 1.3402

Further levels in both directions:

• Below: 1.3301 and 1.3186 and 1.3059
• Above: 1.3402, 1.3494, 1.3613 and 1.3712

OANDA’s Open Positions Ratio

GBP/USD ratio is almost unchanged in the Wednesday session. Currently, long positions have a majority (60%), indicative of trader bias towards GBP/USD reversing directions and moving lower.

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.