Forex Market: GBP/USD daily trading forecast

Yesterday’s trade saw GBP/USD within the range of 1.5182-1.5228. The pair closed at 1.5201, falling 0.11% on a daily basis. It has been the first drop in the past six trading days. The daily low was a lower-low test of the low from November 13th and also the lowest level since November 12th, when a low of 1.5171 was reached. In weekly terms, GBP/USD appreciated 1.22% last week, following a 2.46% slump in the week ended on November 8th.

At 8:14 GMT today GBP/USD was losing 0.16% for the day to trade at 1.5181. The pair touched a daily low at 1.5167 at 6:10 GMT, testing the lower range breakout level (S4). It has been the lowest level since November 11th, when a daily low of 1.5112 was recorded.

Today GBP/USD trading may be influenced by a number of macroeconomic reports as listed below.

Fundamentals

United Kingdom

Consumer inflation

The annual rate of inflation in the United Kingdom probably accelerated to a zero reading in October, according to the median estimate by experts. If so, this would be the 22nd consecutive month, when annualized consumer prices remained below the 2-percent objective, set by the Bank of England. In September the rate of consumer inflation was -0.1%, or the lowest since April 2015.

In September the most notable downward pressure to consumer prices came from cost of transport (-2.7% year-on-year), which marked the eleventh straight month of decline and also the most considerable one since April. Prices of food fell at an annualized rate of 2.3% in September, following another 2.4% drop in August, while cost of recreation and culture slumped 0.8% during the same month, after another 0.9% decrease in August. Additional downward pressure came from prices of clothing and footwear, which were 0.6% lower in September, according to the report by the Office for National Statistics. On the other hand, in September upward pressure to the Consumer Price Index came from cost of housing and utilities, as the latter went up 0.1% year-on-year, following a 0.4% increase in the preceding four months.

The CPI is the main measure of inflation in the UK for macroeconomic purposes and forms the basis of the inflation target set by the government. Every month about 120 000 samples are made, examining the change in prices of about 650 products. They represent the “market basket” of goods and services, on which the index is based.

Key categories in the consumer price index are Transport (accounting for 16.2% of the total weight) and Housing, Water, Electricity, Gas and Other fuels with a 14.4% share. Recreation and Culture accounts for 13.4%, Restaurants and Hotels – 11.4% and Food and Non-alcoholic Beverages – 11.2%. The CPI also encompasses Miscellaneous Goods and Services (9.6%), Clothing and Footwear (6.5%), Furniture, Household Equipment and Maintenance (6.1%). Alcoholic Beverages and Tobacco, Health, Communication and Education comprise the remaining 11.2% of the total weight.

The annualized core consumer price inflation probably remained at 1.0% for a third consecutive month in October, according to market expectations. 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 9:30 GMT.

United States

Consumer inflation

The annualized consumer inflation in the United States probably accelerated 0.1% in October, according to market expectations, after remaining flat in September. In monthly terms, the Consumer Price Index (CPI) probably rebounded in October, up 0.2%, following two months of decline in a row.

In September upward pressure came from cost of services less energy (up 2.7% year-on-year). Within the category, cost of shelter went up 3.2% year-on-year, cost of medical care rose 2.4% and cost of transportation services increased 2.2%. Additionally, consumers paid more for food in September (up at an annualized rate of 1.6%), according to the report by the Bureau of Labor Statistics. The largest downward pressure on the annual CPI came from prices of energy (down 18.4% in September from a year ago).

The CPI is based on a basket of goods and services bought and used by consumers on a daily basis. In the United States the Bureau of Labor Statistics (BLS) surveys the prices of 80 000 consumer items in order to calculate the index. The latter reflects prices of commonly purchased items by primarily urban households, which represent about 87% of the US population. The Bureau processes price data from 23 000 retail and service businesses.

The annualized core consumer inflation, which is stripped of prices of food and energy, probably remained steady at 1.9% in October, according to the median forecast by experts. It has been the highest annual core inflation since July 2014, when core consumer prices rose at an annual rate of 1.9%. This rate is usually reported as a seasonally adjusted figure, because consumer patterns are widely fluctuating in dependence on the time of the year. The Core CPI is the gauge, which the Federal Reserve Bank takes into account in order to adjust its monetary policy. The Fed uses the core CPI, because prices of food, oil and gas are highly volatile, while the central bank’s tools are slow-acting. In case, for example, prices of oil plunge considerably, this could result in a low rate of inflation, but the central bank will not take action until this decrease affects prices of other goods and services.

If the 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 will usually bolster the appeal of the US dollar.

The Bureau of Labor Statistics is to release the official CPI report at 13:30 GMT.

Industrial output, Capacity utilization

Industrial output in the United States probably expanded at a monthly rate of 0.1% in October, according to market expectations. If so, this would be the first increase in output in the past three months. In September industrial production contracted 0.2% from a month ago. Manufacturing production, which accounts for almost three quarters of total industrial production, shrank 0.1% in September, as the output of durable goods was 0.2% lower, while the production of non-durable goods remained steady. Mining sector output contracted 2% during the same period, because of considerable cuts in both the extraction of crude oil and the drilling of oil and gas wells. In addition, warmer-than-usual weather in September boosted the output of utilities by 1.3% month-on-month.

The index of industrial production reflects the change in overall inflation-adjusted value of output in the three major sectors mentioned above. The index is sensitive to consumer demand and interest rates. It is a coincident indicator, which means that changes in its levels generally echo similar shifts in overall economic activity. Therefore, a larger-than-projected monthly increase in the index would usually have a moderate bullish effect on the US dollar. The Board of Governors of the Federal Reserve is to release the production data at 14:15 GMT.

At the same time, capacity utilization rate in the country probably remained unchanged at 77.5% in October. It has been the lowest utilization rate since July 2011, when a level of 77.5% was reported. Lower rates of capacity utilization usually imply weaker inflationary pressure.

Bond Yield Spread

The yield on UK 2-year government bonds went as high as 0.675% on November 16th, after which it closed at 0.645% to lose 2.8 basis points (0.028 percentage point) compared to November 13th. It has been the third consecutive trading day of decline.

The yield on US 2-year government bonds climbed as high as 0.863% on November 16th, after which it closed at 0.855% to add 0.004 percentage point compared to November 13th. It has been the first gain in the past three trading days.

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, expanded to 0.210% on November 16th from 0.178% on November 13th. The November 16th yield spread has been the largest one in at least six months.

Meanwhile, the yield on UK 10-year government bonds soared as high as 1.983% on November 16th, after which it slid to 1.951% at the close to lose 2.6 basis points (0.026 percentage point) compared to November 13th. It has been the third successive trading day of decline.

The yield on US 10-year government bonds climbed as high as 2.278% on November 16th, after which it slipped to 2.275% at the close to remain unchanged compared to November 13th. It has been the first increase in the past five trading days.

The spread between 10-year US and 10-year UK bond yields expanded to 0.324% on November 16th from 0.298% on November 13th. The November 16th yield difference has been the largest one since September 24th, when the spread was 0.386%.

Daily and Weekly Pivot Levels

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

R1 – 1.5205
R2 – 1.5210
R3 (range resistance) – 1.5214
R4 (range breakout) – 1.5226

S1 – 1.5197
S2 – 1.5192
S3 (range support) – 1.5188
S4 (range breakout) – 1.5176

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

Central Pivot Point – 1.5179
R1 – 1.5320
R2 – 1.5407
R3 – 1.5548

S1 – 1.5092
S2 – 1.4951
S3 – 1.4864