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GBP/USD Closes Gap and Pushes Higher On Inflation

British CPI came out higher than expected, with consumer prices rising by an annual rate of 3.4%. This fueled GBP/USD – it closed the weekend gap and broke above a critical line. Will it continue riding north?

British CPI rose from an annual rate of 3% to 3.4%, getting close to this year’s high of 3.6%. Expectations were for a rise to 3.2%. Also the other inflation showed a strong-than expected rise in prices.

RPI – Retail Price Index, printed 4.4%, higher than 4.1% that was predicted. Note that this indicator is always more volatile than others, but some consider it to be more accurate and more relevant to the consumers.

Core CPI  also made it to 3% – it was expected to drop from 2.9% to 2.8%. Core CPI excludes the most volatile components in the consumer prices – energy being one of them. This shows that British prices aren’t rising only on the rise in fuel prices, contradicting Mervyn King’s dismissal of inflation.

In the BOE inflation letter to the government, King disregarded the rise in prices and blamed it mostly on the rise in fuel prices. With the elections coming up in two weeks,the bank will not do anything. The issue of inflation will wait for the next meeting of the central bank and the next government.

GBP/USD Minds the Gap

The British Pound had a bad start to the week – it opened significantly lower than Friday’s close – it opened at 1.5293, about 70 pips lower and below the 1.5350 support line. It later fell as low as 1.5191, a safe distance from the 1.5120 support line.

The recovery already began earlier, but the gap was closed only after the inflation figures were released. GBP/USD jumped higher and peaked at 1.5418 at the moment before retreating just under 1.54.

The Pound is now trading between 1.5350 and 1.5520 – this was both last week’s peak and also a support and resistance line when the Pound traded at higher ranges. Above 1.5520, the next significant resistance line is at 1.5833, which worked as a support and resistance line. The last attempt to break this line failed and sent the Pound way down.

On the downside, the next important line under 1.5120 is at 1.4780, the year-to-date low and also a support line in 2009.

There are many more important events ahead (details in the GBP/USD forecast) – employment figures are the main dish tomorrow. The low expectations could turn into a positive surprise and help the Pound. The MPC Meeting Minutes will probably not reveal anything before the elections.

Retail sales and public sector net borrowing are released on Thursday. Also these are very important indicators, but the biggest event is on Friday. preliminary GDP for the first quarter of 2010 – another quarter of growth is expected after Britain got out of recession in Q4 of 2009.

This could turn into a good week for the Pound, after being beaten for quite some time.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.