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Oct 01, 2016

06:16 PM EDT

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Market Analysis

Posted by Option_Banque in GBPUSD - September 13th, 2016 6:30 pm GMT

Is This A Good Time To Buy GBPUSD Put Options? Inflation Data Says Yes

The British Pound struggled on Tuesday versus the U.S dollar after a slew of economic data reported that Britain’s inflation remained low even though the weaker pound pushed up import prices. The pair GBPUSD pared all of its yesterday’s gains against the backdrop of declining oil prices that sapped investor appetite for risky assets and in turn eased bets against the greenback.

According to figures from the Office for National Statistics, the U.K inflation rate was unchanged in August at 0.6%, falling short of forecasts calling for an increase of 0.7%. A fall in hotel accommodation prices, in addition to smaller rises in the prices of alcohol, clothing and footwear compared to a year ago were offset by upward pressure from rising food prices and air fares, and a smaller decline in motor fuel compared to one year earlier. Core inflation, which strips out volatile food, energy, alcohol, and tobacco products held at 1.3%, missing expectations of 1.4%.

In a separate report, ONS published data on input prices that rose 7.6 percent in August compared to the same month a year earlier, and import costs increased 9.3 percent. Both rates outpaced the July readings and came in at the fastest since 2011, partly owing to a softer pound. However, it may take a little longer for the impact of the weakening local currency to reflect on consumer prices.

Prices of goods sold by manufacturers (PPI output prices) increased only 0.1 percent in August from July, well below economists’ estimates of 0.3%. Nonetheless, the index was up 0.8 percent from a year earlier, marking the biggest annual jump since January 2014.

The retail-prices index matched median forecasts with a 1.8 percent increase on a year-on-year basis after a 1.9 percent increase in July. Meanwhile, the Housing Prices Index published by the U.K government jumped at an annualized pace of 8.3%.

The Bank of England is scheduled to hold its monetary policy meeting this Thursday. Policy is forecast to remain unchanged as the central bank will assess recent economic performance and also assess the outlook for the economy in a post Brexit world.

Elsewhere, crude prices dipped after a monthly report by the International Energy Agency showed that global demand for oil is slowing. The IEA cut its global oil demand forecast by about 100,000 barrels a day for this year and 200,000 barrels a day in 2017. Slumping oil prices pummeled energy shares and weighed on stock markets, causing investors to look for safe-haven assets including the U.S dollar.

The Federal Open Market Committee will gather in Washington next week to discuss the next steps within their monetary policy plans, and any possibility of a rate hike at the meeting. Fed officials are expected to go into the meeting divided on the policy course from here.

While some regional fed governors have been suggesting that the U.S labor market has come close to full employment and are urging a rate hike sooner, rather than later, Fed voter Lael Brainard opined on Monday that the Fed should be patient and wait for more evidence of stronger consumer spending and rising inflation. In a speech to the Chicago Council on Global Affairs, Brainard maintained her dovish stance on rate policy, and referred to potential weakness at home and risks of an economic downturn abroad, as potential risk factors.

Fig: GBPUSD H4 Technical Chart

GBPUSD is on the verge of breaking out of the upward sloping, ascending trading channel, as well as close to breaching the support at 1.32340 for the first time since September 01. With two key indicators – RSI and Stochastics, heading downwards into the oversold zone, and the two moving averages placed above the price action, the pair is expected to fall further. A descending trendline connecting the recent higher highs from recent months up until late August, has come back into play as a support zone. A pullback may be witnessed from near the 1.31700 level.

Trade suggestion

Buy Digital Put Option from 1.32000 to 1.31700 valid until 20:00 GMT September 13, 2016

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