Sterling Attempts to Build on Yesterday’s Advance as Data Schedule Cools

Pound Sterling (GBP/USD, GBP/JPY) Analysis

• GBP/USD looks to retain hard-fought gains as USD holds firm
• 2-year Gilt yields open slightly lower but remain around yesterday’s high
• GBP/JPY has ambitious target in sight ahead of Japanese CPI data

Yesterday UK CPI beat estimates both on the headline and core measures, resulting in downward revisions for interest rate expectations which supported the pound. Stubborn inflation has proven not to be a UK specific problem but has indeed been witnessed in the EU and the US as well.

That’s not to say inflation is not set to trend higher. It’s quite the opposite. Disinflation (prices increasing at a decreasing rate) is likely to continue as long as the Bank of England (BoE) can get a handle on hot services inflation. In yesterday’s CPI print, the major contributor towards the higher reading was the increase in tobacco prices which stemmed from the higher rate of tax it now attracts after Jeremy Hunt’s Autumn Statement. Therefore, price pressures are seen to be shorter-term in nature as the general price trends continue to ease.

GBP/USD Looks to Retain Hard-Fought Gains as USD Holds Firm

Early this morning cable trades slightly higher as the pair attempts to push higher towards 1.2736 but a robust U.S. dollar may pose a challenge to further upside. The dollar benefited from a better-than-expected US retail sales print for the month of December, and when this is viewed alongside stickier inflation during the same period its not unusual to see the dollar recover more ground.

GBP/USD appears to have settled into a choppy, sideways trading pattern since mid-December. The underside of the sideways channel comes in at 1.2585 and the upper bound appears at 1.2794, with current price action trading roughly in the middle of these two levels.

The golden cross and moderate levels seen on the RSI suggest we could see further upside in the pair, however today we have the Fed’s Raphael Bostic speaking and although he is regarded as a centrist his comments around stubborn inflationary pressures could bolster the dollar further, potentially weighing on GBP/USD.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Naturally, two year Gilt yields rose on the news of stickier inflation over December and today we’re seeing a slight easing in early morning trade during the London session which could undermine the recent lift in the pound.

UK 2-Year Yield (GILT)

Source: TradingView, prepared by Richard Snow

GBP/JPY Has Ambitious Target in Sight Ahead of Japanese CPI

GBP/JPY continued its bullish advance yesterday however is also trading slightly lower this morning. recent price action reveals pull backs to be short lived, followed imminently by bullish momentum.

The pair now sees 188.80 as the next level of resistance but keeping in line with the prior observations it would be reasonable to suspect a brief pullback in the interim. the yen has come under pressure in recent weeks as wage growth and inflation data have shown signs of easing, allowing the Bank of Japan more breathing room before deciding on a massive policy change (normalisation).

GBP/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX