Forex Market: GBP/USD daily trading outlook

Yesterday’s trade saw GBP/USD within the range of 1.5108-1.5206. The pair closed at 1.5158, losing 0.25% on a daily basis, while marking the fourth drop in the past six trading days. The daily low has been the lowest level since December 9th, when a low of 1.5001 was registered.

At 9:10 GMT today GBP/USD was up 0.03% for the day to trade at 1.5147. The pair touched a daily high at 1.5186 during early Asian trade, overshooting the range resistance level (R3). Support may be received at the hourly 200-period EMA (1.5123), while resistance may be encountered at the high from December 14th (1.5206).

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 0.1% in November, according to the median estimate by experts. If so, this would be the 23rd consecutive month, when annualized consumer prices remained below the 2-percent objective, set by the Bank of England. In October the rate of consumer inflation was -0.1%, or the same as in September.

In October the most notable downward pressure to consumer prices came from cost of food and non-alcoholic beverages (down 2.7% year-on-year and following a 2.3% slump in September). Additional downward pressure came from cost of transport (down 2.6% and following a 2.7% decline in September) and cost of recreation and culture (down 0.4% after a 0.8% drop in the prior month), according to the report by the Office for National Statistics. On the other hand, in October upward pressure to the Consumer Price Index came from cost of housing and utilities, as the latter went up 0.2% year-on-year, following a 0.1% increase in the preceding month. In addition, consumers paid more for restaurants and hotels (up 1.6% year-on-year and following a 1.8% surge in September), miscellaneous goods and services (up 0.8% and following a 0.6% increase in the previous month) and clothing and footwear (up 0.8% and following a 0.6% slump in September).

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 accelerated to 1.2% in November, according to market expectations, from 1.1% in October. If so, Novembers core inflation would be the highest since July. 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 to 0.5% in November, according to market expectations, from 0.2% in October. If so, it would be the highest rate of inflation since December 2014, when the annual CPI rose 0.8%. In monthly terms, the Consumer Price Index (CPI) probably remained flat in November, after a 0.2% increase in October.

In October upward pressure came from cost of services less energy (up 2.8% year-on-year). Within the category, cost of shelter went up 3.2% year-on-year, cost of medical care rose 3.0% and cost of transportation services increased 1.8%. Additionally, consumers paid more for food in October (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 17.1% in October from a year ago).

The annualized core consumer inflation, which is stripped of prices of food and energy, probably accelerated to 2.0% in November, according to expectations, from 1.9% registered in September and October. If so, Novembers core inflation would be the highest since May 2014. It 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 a key measure, because this 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 (as is the present situation), 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.

In case actual CPI performance came in line with expectations or even exceeded them, this would add to the case for a rate hike later this week.

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

NAHB Housing Market Index

The National Association of Home Builders (NAHB) Housing Market Index probably rose in December to a reading of 63.0, according to market expectations, from 62.0 reported in the preceding month. If so, this would be the 18th consecutive month, when the gauge stood in the area above 50.0. The indicator is based on a monthly survey in regard to current home sales and expected sales in the coming six months. Values above the key level of 50.0 indicate that housing market conditions are good. Therefore, higher-than-projected readings would provide support to the US dollar. The official data is scheduled for release at 15:00 GMT.

Bond Yield Spread

The yield on UK 2-year government bonds went as high as 0.633% on December 14th, after which it closed at 0.632% to add 5 basis points (0.05 percentage point) compared to December 11th. It has been the first gain in the past three trading days.

The yield on US 2-year government bonds climbed as high as 0.960% on December 14th, or the highest level since December 7th (0.967%), after which it closed at 0.952% to add 7.3 basis points (0.073 percentage point) compared to December 11th. It has been the 15th gain in the past 21 trading days.

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, widened to 0.320% on December 14th from 0.297% on December 11th. The December 14th yield spread has been the largest one since December 10th, when the difference was 0.333%.

Meanwhile, the yield on UK 10-year government bonds soared as high as 1.871% on December 14th, after which it closed at 1.870% to add 5.6 basis points (0.056 percentage point) compared to December 11th. It has been the first gain in the past three trading days.

The yield on US 10-year government bonds climbed as high as 2.230% on December 14th, after which it slipped to 2.220% at the close to add 8.8 basis points (0.088 percentage point) compared to December 11th. It has been the 7th gain in the past 21 trading days.

The spread between 10-year US and 10-year UK bond yields widened to 0.350% on December 14th from 0.318% on December 11th. The December 14th yield difference has been the largest one since December 10th, when the spread was 0.364%.