Week Ahead: GBPUSD to react to CPI prints

UPDATE: Next Bank of England decision has been postponed from Sept. 15 to Sept. 22

 

Red-hot inflation remains a scourge for the global economy, undermining its post-pandemic recovery. In response, central bankers have been furiously hiking interest rates in other to tame runaway consumer prices.

Over the coming week, GBPUSD traders will be assessing the impact from the latest inflation readings out of either side of the pond, along with a crucial Bank of England rate decision:

Monday, September 12

• GBP: UK July monthly GDP, industrial production, external trade
• EUR: ECB Executive Board member Isabel Schnabel’s speech

Tuesday, September 13

• AUD: Australia August household spending, business confidence, September consumer confidence
• GBP: UK July unemployment rate, August jobless claims
• EUR: Germany August CPI (final), September ZEW survey expectations
• USD: US August CPI
• Twitter shareholders to vote on sale to Elon Musk

Wednesday, September 14

• JPY: Japan July industrial production (final)
• GBP: UK August CPI
• EUR: Euro area July industrial production
• US crude: EIA weekly oil inventory report

Thursday, September 15

• NZD: New Zealand 2Q GDP
• AUD: Australia August unemployment rate, September consumer inflation expectations
• GBP: Bank of England rate decision (postponed to Sept. 22)
• USD: US weekly initial jobless claims, August retail sales, industrial production

Friday, September 16

• CNH: China August industrial production, retail sales, jobless rate
• EUR: Eurozone August CPI (final)
• USD: US September consumer sentiment

 

And here are the market forecasts for the following key events:
 

1. (Tuesday) US August CPI: 8.1% year-on-year (lower than July’s 8.5% print).
   
   If so, that would mark two straight months of easing in the headline annual print, which markets may perceive as a sign that US inflation has peaked. Such a trend should eventually allow the Fed to back away from supersized rate hikes, while potentially prompting the US dollar to moderate.
   
   Still, the core CPI year-on-year figure is expected to come in at 6.1% - its highest since April. That suggests that the Fed’s battle against inflation is far from over.
   
    
2. (Wednesday) UK August CPI: 10.4% year-on-year (higher than July’s 10.1%).
   
   UK households are already contending with a cost-of-living crisis, with headline inflation having punched its way into double-digit territory well ahead of forecasts.
   
   Yet another higher-than-expected CPI reading would only darken the economic outlook for the UK, and underscore the tremendous battle facing the Bank of England.
   
    
3. (Thursday) BOE rate decision - postponed to Sept. 22: At the time of writing, markets are pricing in a mere 18.4% chance that the Bank of England will press ahead with a 75-basis point hike.
   
   However, a higher-than-expected UK CPI print could raise the odds for such a bumper hike which would be the BOE’s largest since 1989.
   
   A 75bps hike would also help the BOE keep up with similar moves already made recently by its major peers such as the US Federal Reserve and the European Central Bank.

 

Ultimately, GBPUSD traders may face a range of scenarios, depending on how those CPI prints and the keenly-awaited BOE rate decision play out:

• Higher-than-expected CPI prints, either for the US or the UK, that prompt markets to expect more incoming jumbo-sized rate hikes by its central bank could lead to a stronger currency.
   
• A lower-than-expected inflation figure that pares market bets for the size of the incoming rate hikes should move that currency lower.
   
• If the Bank of England sticks with a “relatively dovish” 50-basis point hike, while signalling growing concern for the UK economy, that may also prompt GBP declines.
   
• Should the BOE indeed trigger that massive 75bps hike, while telling markets to keep expecting more of these larger hikes in the coming months, that may translate into limited GBP gains.

 

At the time of writing, GBPUSD is enjoying some relief as it pokes its head back above 1.160 while pulling away from its lowest since 1985.

 

However, GBPUSD's upside remains significantly capped by the negative sentiment surrounding the UK economic outlook, with markets currently pricing in a greater chance (34.3%) that 'cable' would trade back below 1.15 rather than back above 1.17 (30.9%) over the coming week.

 

Much would depend on the actual CPI figures, and the Bank of England’s official decision and comments surrounding its path forward for UK interest rates.

 

inflation CPI Bank of England rate hike GBPUSD British Pound Sterling Federal Reserve US Dollar