British Pound Fails to Hold Ground Despite the Rise in U.K. CPI, Euro Consolidate

British Pound Fails to Hold Ground Despite the Rise in U.K. CPI, Euro Consolidate


The British Pound advanced against the greenback during the European session, with the exchange rate rising to a high of 1.6875 as the economic docket reinforced an improved outlook for the U.K however, the GBP/USD failed to hold ground as investors scaled back their appetite for risk ahead of the U.S. session.

Talking Points

• Japanese Yen: Strengthens on Risk Aversion
• Pound: Consumer Prices Rise More Than Forecast
• Euro: Trade Surplus Widens, Led by Exports
• US Dollar: PPI, Industrial Production on Tap

British Pound Fails to Hold Ground Despite the Rise in U.K. CPI, Euro Consolidate



The British Pound advanced against the greenback during the European session, with the exchange rate rising to a high of 1.6875 as the economic docket reinforced an improved outlook for the U.K however, the GBP/USD failed to hold ground as investors scaled back their appetite for risk ahead of the U.S. session. Nevertheless, as the GBP/USD rally remains well supported by the 20-Day moving average at 1.6560, we may see the pair continue to retrace the sell-off from August throughout the remainder of month, and could test the yearly high at 1.7045 for near-term resistance. However, as the RSI currently stands at 65 and continues to approach overbought territory, the lack of momentum to break above the weekly high (1.6879) could keep the pound-dollar range-bound ahead of the Bank of England Minutes due out tomorrow at 9:30 GMT.

Consumer prices in the U.K. increased 0.2% in October to top expectations for a 0.1% rise, with the annual rate of inflation expanding 1.5% from the previous year after growing 1.1% in September. Moreover, the core CPI tipped higher to an annualized pace of 1.8% from 1.7% in the previous month, and the data suggests that the Bank of England will maintain a neutral policy stance going forward as policy makers aim to balance the risks for growth and inflation. Meanwhile, BoE board member Andrew Sentance held a cautious outlook for the economy and said that the central bank should continue to support growth as the recovery remains in its early stage. As a result, Mr. Sentance argued that the MPC ‘have to be open minded’ on its asset purchase program and expects price pressures to be volatile over the near-term as the expansion in monetary and fiscal policy continues to work its way through the real economy. As policy makers see a risk for a protracted recovery and hold a dovish outlook for future policy, the market may react to the BoE meeting minutes due out tomorrow however, we could see mute price action following the report if the central bank reiterates its stance from the quarterly inflation report earlier this month.

The euro halted the two-day advance against the U.S. dollar and slipped to a low of 1.4894 during the overnight trade, but it looks as though the EUR/USD is finding intraday support ahead of the 20-Day SMA at 1.4884. Nevertheless, the euro-dollar could be forming a double-top as the pair continues to fall back from the November highs, and the bearish divergence in the RSI suggests we will see a break to the downside over the near-term as rally tapers off. As a result, a break below the 50-Day SMA (1.4785) should lead the pair to retrace the advance from September and is likely to expose the 100-Day moving average at 1.4487. Meanwhile, the Euro-Zone economic calendar showed the trade surplus widened to 6.8B seasonally adjusted in September from a revised reading of 2.2B as exports increased 5.5% from August, and the data encourages an improved outlook for future growth as the economy emerges from the worst recession since the post-war period.

The greenback strengthened across the board, with the USD/JPY bounce back from the low (88.73) to trade above 89.00, and the reserve currency may continue to appreciate going into the North American trade as equity futures foreshadow a lower open for the U.S. market. Nevertheless, producer prices in the world’s largest economy are forecasted to rise 0.5% in October after falling 0.6% in the previous month, while the annualized rate is projected to contract 1.8% during the month after tumbling 4.8% in September. In addition, industrial outputs are expected to increase 0.4% in October to mark the third consecutive monthly advance, while the capacity utilization rate is expected to rise to 70.8% from 70.5% in September.