The European currency market is in a state of flux this afternoon. All eyes are now on the United Kingdom inflation (CPI) data due out at 2pm today.
Anyone holding a position in the Pound Sterling can certainly feel the market's slow pace, as if the big sharks are holding their breath before releasing new momentum.
With Sterling already suffering from domestic political uncertainty following the ruling party's crushing defeat in the local elections, this CPI data is not just a number, it is a life and death determinant for the Pound and the Dollar market.
April CPI Expectations Fall
The market is forecasting UK annual inflation (YoY) to fall to 3% for April, down from 3.3% in March.
The decline is largely due to Ofgem's energy price cap cut that was implemented before the Iran war broke out, thus acting as a "bulwark" to withstand the impact of an energy shock.
For the market, if this data comes out as expected, it will give the Bank of England (BoE) a lot of leeway to keep interest rates unchanged in June.
This is very important because the UK unemployment data that jumped yesterday proved that their economy is starting to struggle. Investors are starting to calculate that the BoE does not need to rush to raise rates, which in the short term could temporarily ease panic.
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However, do not be fooled by this temporary calm. Ofgem is scheduled to review the energy price cap in July, and electricity and gas bills are expected to jump sharply in the third quarter (Q3).
The BoE itself expects inflation to peak back to 4% by the end of the year. Several economists have warned early that second round effects will hit the market in the second half of the year.
This realization makes investors hesitant to hold Sterling for too long because they know that the risk of UK inflation is actually still "burning in the husk".
UK Politics Stirs Leaves, BoE Refuses to 'Itch'
Adding salt to Sterling's wounds, political instability after the Labour party's defeat in local elections continues to undermine global investor confidence (risk sentiment).
BoE Deputy Governor Sarah Breeden herself openly warned that this political situation is damaging the business ecosystem and advised the central bank not to "itch" to raise interest rates.
This cautious statement puts the Pound in a very fragile defensive position. If inflation suddenly surprises by jumping up, the BoE will be trapped in a terrible stagflation dilemma, where the economy is declining but inflation is rising.
This situation will force investors to flee capital into the warm embrace of the US Dollar, which in turn will pressure the Pound.
MARKET TECHNICAL STRUCTURE
Based on the GBP/USD (Cable) chart structure, the remnants of last week's fall are still noticeable0
Current Bias: Bearish to Neutral
Key Resistance (1.3450): This level is a long-standing support level that has now turned into a very hard resistance wall (Support Become Resistance).
Buyers need a huge momentum surge from today’s data to break through 1.3450 if they want to restore hope towards the 1.3530 – 1.3540 level. As long as the price is below 1.3450, sellers are ready to hit the Sell button.
Key Support (1.3305): This is the price floor formed last Monday. If the CPI data is reported too high and triggers panic selling, a break below 1.3305 will open the door to a more severe free fall, targeting the April hard support area around 1.3175.
MARKET EXPECTATIONS
👉 Scenario A: If UK CPI Data Soars (USD Strengthens, GBP Falls) If UK inflation surprises to the upside, the market will panic over the risk of UK stagflation.
Sterling will be dumped aggressively breaking the 1.3305 support. This will trigger a global risk off chain where investors rush into the US Dollar, causing US bond yields to rise.
👉 Scenario B: If UK CPI Data Falls (GBP Recovers) If inflation is confirmed to stabilize around 3.0% or lower, the market will breathe a sigh of relief as the BoE has time to calmly assess the impact of the Middle East conflict.
The pound will experience a technical rebound to retest the 1.3450 level. This slightly calmer sentiment will temporarily weaken the US Dollar.
Highlights
UK CPI & PPI Report (2.00 PM Malaysia Time): This is a high impact event. Traders are waiting for a deviation from the forecast 3.0%. Any difference of even 0.1% will trigger volatility of hundreds of pips within seconds.
