Sterling pares losses after US CPI jumps

The British pound has taken investors for a ride today, as GBP/USD dropped sharply but has since recovered. In the North American session, GBP/USD is trading at 1.1856, down 0.28%. It has been a busy day on the economic calendar, with a host of UK releases and the US inflation report.

US inflation accelerates (again)

In the US, the long-sought-after inflation peak remains as elusive as ever. The June inflation report showed headline inflation rising to 9.1% YoY, up from 8.6% and above the 8.8% estimate. Core CPI ticked lower to 5.9%, down from 6.0%. Still, this was higher than the forecast of 5.7%. With inflation remaining at high levels, the path is clear for the Fed to fire at will in order to curb inflation. Just a few days ago, CME’s FedWatch pegged a 75bp hike at 93%, with a 7% chance of a 100bp move. The June inflation release has dramatically changed the FedWatch assessment, with a 53.6% of a 75bp move and 46.3% likelihood of a 100bp hike.

The British pound took a tumble immediately after the US inflation release, falling 0.76%. The pound has managed to claw back most of these losses, but the risk of the US dollar moving higher remains elevated, as a massive 100bp increase has become a very real possibility at the Fed meeting in late July.

Overshadowed by the dramatic US inflation report, UK indicators enjoyed a good day. GDP for May rose 0.5% MoM, bouncing back from a -0.2% reading in April and beating the estimate of 0.1%. Industrial Production and Manufacturing Production both ended a 3-month skid with monthly gains of 1.4% and 0.9%, respectively. Still, the bigger picture for the UK economy is not a rosy one, as a Bloomberg poll of economists indicated a 45% likelihood of the UK economy tipping into a recession in the next 12 months.

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GBP/USD Technical

• GBP/USD tested support at 1.1876 earlier in the North American session. Below, there is support at 1.1736
•  GBP/USD faces resistance at 1.2025 and 1.2175

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