Forex Market: GBP/USD trading outlook for October 18th 2016

Yesterday’s trade (in GMT terms) saw GBP/USD within the range of 1.2136-1.2204. The pair closed at 1.2183, inching down 0.03% compared to Fridays close. It has been the 195th drop in the past 361 trading days and also a second consecutive one. The major pair has extended its slump to 6.13% so far during the current month, after losing 1.23% in September.

At 7:09 GMT today GBP/USD was edging up 0.48% on the day to trade at 1.2242. The pair touched a daily high at 1.2275 during the early phase of the Asian trading session and a daily low at 1.2177 during early Asian trade as well.

On Tuesday GBP/USD trading may be influenced by the following macroeconomic reports as listed below.

Fundamentals

United Kingdom

Consumer Price Index

The annual rate of inflation in the United Kingdom probably accelerated to 0.9% in September, according to the median estimate by experts, from 0.6% in the prior two months. If so, it would be the 32nd consecutive month, when annualized consumer prices remained below the 2-percent objective, set by the Bank of England. It would also be the highest inflation rate since November 2014.

In August, upward pressure to the general index of consumer prices came from cost of transportation (up 1.0% year-on-year after a 0.2% gain in July), recreation and culture (up 0.7% after a 0.6% increase in the previous month), restaurants and hotels (up 2.3%, following a 2.7% surge in July) and miscellaneous goods and services (up 0.8%, decelerating from a 0.9% rise in July), according to the report by the Office for National Statistics.

On the other hand, in August, downward pressure to the Consumer Price Index came from cost of housing and utilities (down 0.1% year-on-year, or the same rate as in July), food and non-alcoholic beverages (down 2.2%, following a 2.6% slump in July), clothing and footwear (down 1.2%, accelerating from a 0.7% drop in July) and furniture, household equipment and maintenance (down 1.0% after a 0.8% decrease in the prior month).

The annualized core consumer price inflation probably accelerated to 1.4% in September, according to market expectations, from 1.3% in August. This indicator measures the change in prices of goods and services purchased by consumers, without taking into account volatile components such as food, energy products, alcohol and tobacco.

In case the annual CPI came in line with expectations or further approached the central bank’s inflation objective, this would have a strong bullish effect on the Sterling. The Office for National Statistics (ONS) will publish the official CPI report at 8:30 GMT.

United States

Consumer Price Index

The annualized consumer inflation in the United States probably accelerated to 1.5% in September, according to market expectations, from 1.1% in the preceding month. If so, this would be the highest inflation rate since October 2014. In monthly terms, the Consumer Price Index (CPI) probably rose 0.3% in September, according to the market consensus, following a 0.2% increase in the prior month.

In August, cost of food remained flat from a year ago, following a 0.2% increase in July. It has been the lowest food inflation since February 2010. Cost of transportation services rose 3.1% year-on-year in August, accelerating from 3.0% in July, cost of shelter surged 3.4% year-on-year, picking up from 3.3% in July, while cost of medical care soared at an annual 5.1%, accelerating from 4.1% in July, according to the report by the Bureau of Labor Statistics. On the other hand, cost of energy fell 9.2% in August compared to the same month a year earlier, slowing down from a 10.9% drop in July.

The annualized core consumer inflation, which is stripped of prices of food and energy, probably remained stable at 2.3% in September, according to market expectations. In July, the Core CPI rose 2.2% year-on-year.

If the general CPI tends to approach the inflation objective, set by the Federal Reserve and considered as providing price stability, or a level below but close to 2%, this would usually heighten the appeal of the US dollar, as it increases the probability of monetary policy tightening.

The Bureau of Labor Statistics is to release the official CPI report at 12:30 GMT.

Bond Yield Spread

The yield on UK 2-year government bonds went up as high as 0.288% on October 17th, or the highest level since June 24th (0.337%), after which it closed at 0.208% to lose 1.1 basis points (0.011 percentage point) compared to October 14th.

Meanwhile, the yield on US 2-year government bonds climbed as high as 0.847% on October 17th, after which it fell to 0.823% at the close to lose 2 basis points (0.02 percentage point) compared to October 14th.

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, narrowed to 0.615% on October 17th from 0.624% on October 14th. The October 17th yield spread has been the lowest one since September 15th, when the difference was 0.585%.

Daily, Weekly and Monthly Pivot Levels

By employing the Camarilla calculation method, the daily levels of importance for GBP/USD are presented as follows:

R1 – 1.2189
R2 – 1.2195
R3 (Range Resistance – Sell) – 1.2202
R4 (Long Breakout) – 1.2220
R5 (Breakout Target 1) – 1.2242
R6 (Breakout Target 2) – 1.2251

S1 – 1.2177
S2 – 1.2171
S3 (Range Support – Buy) – 1.2164
S4 (Short Breakout) – 1.2146
S5 (Breakout Target 1) – 1.2124
S6 (Breakout Target 2) – 1.2115

By using the traditional method of calculation, the weekly levels of importance for GBP/USD are presented as follows:

Central Pivot Point – 1.2241
R1 – 1.2392
R2 – 1.2598
R3 – 1.2749
R4 – 1.2901

S1 – 1.2035
S2 – 1.1884
S3 – 1.1678
S4 – 1.1473

In monthly terms, for GBP/USD we have the following pivots:

Central Pivot Point – 1.3113
R1 – 1.3312
R2 – 1.3645
R3 – 1.3844
R4 – 1.4042

S1 – 1.2780
S2 – 1.2581
S3 – 1.2248
S4 – 1.1914