Forex Market: GBP/USD comes off one-week highs as investors look to US CPI data for Fed taper clues

GBP/USD extended a pullback from recent one-week peak on Monday, as the US Dollar strengthened ahead of key macro data that may provide clues over the timing of the Federal Reserve’s asset purchase tapering.

Having registered its first weekly gain in three last week due to increased safe haven demand and higher US bond yields, the US Dollar started the new, data-laden week on a stronger footing against a basket of six major peers, with investor focus setting on US inflation numbers due out on Tuesday. The Dollar Index was edging up 0.16% on the day to 92.789.

US CPI inflation, retail sales and industrial production figures this week will be closely watched by Forex traders, since they frame macroeconomic performance just before the highly anticipated FOMC policy meeting on September 21st-22nd. US core CPI inflation is expected to decelerate to 4.2% in August, according to a consensus of analyst estimates.

“A couple of dynamics favour the dollar,” Rodrigo Catril, senior currency strategist at National Australia Bank in Sydney, was quoted as saying by Reuters.

“Re-opening still faces challenges from the consumer, who is cautious and from bottlenecks which restrict ability for the economy to rebound with some gusto. At the same time rising infections suggest we may still need to reintroduce restrictions of some sort. The other thing is that the Fed continues to signal that tapering is coming.”

Still, bond markets seem not convinced that a slowdown in CPI inflation could postpone the scale back of Fed’s asset purchases, with 10-year US bond yields rising for a third straight week last week. The yield on 10-year Treasuries was last at 1.3326%.

In an interview with Nikkei on Monday, Fed President for Philadelphia Patrick Harker spoke in favor of tapering the central bank’s bond-purchasing program.

“My baseline forecast is still to have inflation around 4% this year, ending this year, and then starting to fall back to 2% over the years 2022 and 2023. However, I do see elevated risk that inflation could run higher,” Fed’s Harker said for Nikkei.

“I’d like to start the taper process soon, so that we can finish the tapering process, so if we need to increase the policy rate, we have the room to do that.”

As of 8:53 GMT on Monday GBP/USD was edging down 0.10% to trade at 1.3811, while moving within a daily range of 1.3797-1.3846. Last week the Forex pair climbed as high as 1.3888, which has been its strongest level since September 3rd (1.3892). The major currency pair has risen 0.44% so far in September, following a 1.08% loss in August.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled -0.16 basis points (-0.0016%) as of 8:15 GMT on Monday, up from -1.9 basis points on September 10th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.3846
R1 – 1.3867
R2 – 1.3910
R3 – 1.3931
R4 – 1.3953

S1 – 1.3803
S2 – 1.3781
S3 – 1.3739
S4 – 1.3696