Strong U.K Inflation Magnifies Dollar Weakness – Call Options Suggested On GBPUSD
The British Pound rose against the U.S dollar on Tuesday, looking set to close higher versus the greenback for the fourth session in the last five trading days. The bullish sentiment in GBPUSD has been buoyed by a weaker dollar and U.K inflation data, which was reported to have jumped to its highest in nearly two years.
Data from the Office for National Statistics reported that U.K consumer prices added 1% in September compared to the same month a year ago, following a 0.6% rise in the year to August. The reading outstripped expectations of a rise to 0.9%, and reached the 1% rate for the first time since November 2014. ONS said it did not see explicit evidence of the pound’s weakness in consumer-price changes, but it is affecting producer prices as a cheaper local currency pushes up the price of imported goods in the UK.
The rise in the U.K’s inflationary pressures may drive the Bank of England away from its plan to cut rates in order to protect the economy from headwinds created by the departure of the U.K from the single market. Hence, the possibility of the Cable falling below the 1.20000 level against the US dollar seems to be abating.
Such a possibility may be dampened further based on recent comments by the U.S Federal Reserve, which did not directly reject the likelihood of a U.S rate hike by the year end, but suggested that policymakers may not be as aggressive in increasing interest rate as they were in December 2015.
Fed vice Chair Stanley Fisher on Monday cited rising household savings due to an aging population, weak investment, and a slowing in foreign economic growth as factors contributing towards keeping interest rates low. Additionally, he also said that he didn’t see any threat to financial stability from the currently low rates.
Fisher’s remarks came after Chairwoman Janet Yellen’s speech last week where she stated that she was open to running a “high-pressure economy” with low interest rates.
The U.S dollar consequently fell against most major currencies, and was dragged down further by data released on Monday which showed manufacturing in the New York area contracted further in October. The Empire State index fell deeper into contraction to negative 6.8 from negative 2 in September, marking the weakest reading since May.
Later today, the US will release its own September inflation figures, which are expected to point to an increase compared to the August readings. Better-than-expected numbers will likely fuel hopes of a December hike and therefore boost the greenback.
GBPUSD bottomed out near 1.21400 and has rallied since then. The price action crossed over the short-term MA20 which suggests a reversal upwards. The up-moves seem to be stable and durable, as the market has just entered bullish territory. This move is further confirmed by the RSI chart. The pair is very likely to drift higher as the ADX has surged above 20 after a continuous period of retreating lower. A widening gap between +DI line and –DI line helps confirm the rally.
GBPUSD Trade Suggestion
Buy Digital Call Option from 1.23000 to 1.23800 valid until 20:00 GMT October 18, 2016