GBP to USD Forecast: UK Inflation Rate Runs Hotter-Than-Expected at 6.7%

Highlights

• The UK annual inflation rate remained unchanged at 6.7% in September.
• Despite softer UK wage growth numbers from Tuesday, the Bank of England will remain under pressure to tackle sticky inflation.
• The Middle East conflict and possible lasting effects on oil prices may be another consideration for the BoE.

Overview of the Tuesday Session

On Tuesday, the GBP/USD declined by 0.24%. Partially reversing a 0.57% gain from Monday, the GBP/USD pair ended the day at $1.21827. The GBP to USD pair rose to a high of $1.22163 before falling to a low of $1.21327.

UK Inflation in the Spotlight

UK inflation figures for September were in the spotlight on Wednesday.

The UK annual inflation rate held steady at 6.7% vs. a forecast of 6.6%. Core inflation also beat forecasts. The core inflation rate softened from 6.2% to 6.1%. Economists forecast a core inflation rate of 6.0%.

According to the Office for National Statistics,

• The Consumer Price Index including, owner occupiers’ housing costs, increased by 6.3% year-over-year. (Aug: 6.3%).
• Core CPIH also rose at the same rate as in August, up 5.9% in 12 months to September.
• The annual rate of food and non-alcoholic beverages softened from 13.6% to 12.2%.
• Motor fuel prices made the largest upward contribution to the annual inflation rates.
• Year-over-year, motor fuel prices fell by 9.7% compared with a 16.4% decline in August. Rising petrol and diesel prices impacted motor fuel inflation rates.

UK wage growth figures from Tuesday eased pressure on the Bank of England (BoE) to push interest rates higher. However, sticky inflation will leave rate hikes on the table despite softer wage growth.

Bank of England Governor Andrew Bailey and Chief Economist Huw Pill recently discussed how finely balanced interest rate decisions will be. The mixed reports will leave the GBP/USD facing BoE monetary policy uncertainty.

The GBP/USD reacted to the inflation report, rallying from 1.21841 to a post-stat high of $1.22110.

The Fed, the Middle East, and the Housing Sector in Focus

US housing sector data will draw investor interest on Wednesday. A marked deterioration in housing sector conditions could reignite fear of a hard landing.

The US housing sector contributes less than 20% to the US economy. However, a deteriorating housing sector environment impacts consumer confidence and spending. US private consumption accounts for over 65% of the US economy. A weak consumption outlook may ease pressure on the Fed to lift interest rates.

After better-than-expected US retail sales figures on Tuesday, FM member commentary needs consideration. FOMC Members Christopher Waller, John Williams, Michelle Bowman, and Patrick Harker are on the economic calendar to speak. Reaction to the retail sales report will draw investor interest.

Away from the economic calendar, the Middle East conflict and US President Joe Biden visit will be focal points. An escalation in the conflict would drive buyer demand for the US dollar.

Short-Term Forecast

Sticky inflation may force the BoE to lift rates higher despite softer wage growth figures. Dovish Fed commentary could tilt monetary policy divergence toward the Pound. However, geopolitical tension remains a headwind for the GBP/USD.

GBP to USD Price Action

Daily Chart

The GBP/USD pair sat below the 50-day and 200-day EMAs, sending bearish price signals.

Hawkish Fed commentary and concerns over the Middle East conflict would pressure the GBP/USD. A fall below the session low of $1.21500 would bring sub-$1.21 and the $1.19055 support level into view.

However, a de-escalation in the Middle East and dovish Fed chatter would support a break above the $1.22150 resistance level. A move through the $1.22150 resistance level would give the bulls a run at the 50-day EMA.

The 14-period daily RSI reading of 42.64 suggests a GBP/USD fall below $1.21 before entering oversold territory.

4-Hourly Chart

The GBP/USD hovers below the 50-day and the 200-day EMAs, reaffirming bearish price signals.

A GBP/USD breakout from the 50-day EMA and the $1.22150 resistance level would support a move toward the 200-day EMA.

However, failure to break above the 50-day EMA would leave sub-$1.21 and the $1.19055 support level in view.

With an RSI reading of 49.92 for the 14-period 4-hourly Chart, the GBP/USD could drop below $1.21 before entering oversold territory.