GBP/USD, GBP/JPY: UK CPI in focus after soft prints from NZ, CA

Those seeking clues of broad central-bank easing have been gifted two soft inflation reports over the past 12 hours, from Canada and New Zealand. This could bode well for the RBA given the similarities between their respective economies, although the real proof in the pudding for doves would be to see services inflation move lower for key regions.

And this brings us nicely on to today’s UK inflation report. May’s figures revealed that headline inflation had fallen the BOE’s 2% target for the first time in years. The CPIH index – which includes housing, also softened to 2.8%, and has been falling alongside the headline figure, even if at elevated levels.

Yet services inflation remains a thorn in the side for the Bank of England (BOE) and UK consumer, which remains at the lofty height of 5.7%. And with core CPI rising 0.5% m/m in May, BOE easing is not a sure thing, especially with GDP data also beating expectations.

The 1-month OIS suggests ~48% chance of a 25bp next month, which means it is on a knives edge as to whether the BOE (Bank of England) cut their interest rate when they next meet on August 1^st. The 2-month implies a 56% chance it will be in September.

GBP/USD technical analysis:

The combination of Fed rate-cut bets and stronger UK data has been an effective catapult for GBP/USD, with the pound now sitting just beneath its 1-year high. 1.30 is the next major hurdle for bulls to clear, which it could so with ease if UK CPI disappoints too much to the upside.

Yet the move appears to be stretched over the near-term and a pullback would not surprise me. And a soft set of inflation figures today could be just the ticket. The March high just below 1.29 strikes me as a feasible support area for bears to target or bulls to seek re-entries. Beyond that, I suspect the UK could be looking at fresh highs as the US dollar continues to unravel alongside yields and US economic data.

GBP/JPY technical analysis:

I am viewing GBP/JPY in a similar fashion to USD/JPY: The minor gains achieved this week appear ripe for bears to fade into for another leg lower. Yes, there is a very strong bullish trend on the daily chart. But we strongly suspect with the rest of the world that the MOF intervened at the release of the US inflation report which sent the yen broadly higher in the minutes that followed.

So whilst GBP/JPY is holding above the 20-day EMA, we could be witnessing some rendition of a dead-cat bounce. And with that bias in mind, moves towards (or even slightly beyond) the 206.34 high could become a false break and reversal lower. If so, 204 could make a decent interim downside target, with the weekly S1 (203.52), 203 and 202 handles also coming into play should the yen continue to broadly rise.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge