Trading volatility: GBP/USD around UK inflation data

Headline consumer price inflation was 4 per cent in December, less than half the rate at the start of 2023, but it is still double the BoE's target rate of 2%. So where is the risk? While the BoE has been worried by the stickiness of inflation and the risk of still higher wages, Swati Dhingra, the only member of the MPC to vote for a rate cut at the last meeting, argued that goods price deflation would be potent enough to see UK inflation at the central bank's 2 per cent target this year. So, will inflation drop more than forecast and will the markets interpret this to mean that the BoE may cut rates at its next meeting on 21st March? IGTV’s Jeremy Naylor looks at the potential downside for GBP/USD.

(AI Video Summary)

UK inflation data

The trading opportunity is related to UK inflation data that will be released on Wednesday, February 14th. The data will include information on consumer price inflation, producer prices, and retail prices. Currently, consumer price inflation is at 4%, which is lower than the rate at the beginning of 2023, but still higher than the Bank of England's target of 2%. The speaker believes that this presents a possible downside risk for the sterling trade.

Bank of England

While the Bank of England has expressed concerns about inflation remaining high and the possibility of higher wages, Fawzi Dhingra, the only member of the MPC to vote for a rate cut in the previous meeting, argues that deflation in goods prices could bring UK inflation down to the central bank's target this year. The key question is whether the inflation data released on Wednesday will drop more than expected. If it does, there is a chance that the market will interpret this as a sign that the Bank of England might cut interest rates sooner rather than later. This could lead to a potential downside for the sterling trade, with a possible price point of 126.31.

There's a couple of levels to watch on the downside. There is a 200-day moving average at 125.65 and a previous low point on Monday, February 5th, at 125.18. If the price breaks through these levels, it could potentially go all the way down to 120.38. The speaker acknowledges that reaching this level would require significant weakening, but wants to highlight the potential downside if there is a more aggressively negative inflation number on Wednesday.