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GBP/USD. British inflation and the French threat

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The pound-dollar pair has been testing the resistance level of 1.3830 for the second day in a row, which corresponds to the upper line of the Bollinger Bands indicator on the D1 timeframe. The growth of inflation in the UK is on the side of the pound, as well as the hawkish intentions of the representatives of the Bank of England. While the “echoes of Brexit” put pressure on the British currency, not allowing the GBP/USD bulls to overcome the price barrier above. As a result, the pair demonstrates a fairly high intraday volatility, but at the same time it cannot break through to the boundaries of the 39th figure.

Let’s start with British statistics. Today’s macroeconomic reports left a double impression. On the one hand, the main components of the inflation release were in the red zone, falling short of the forecast values. On the other hand, inflation still remains at fairly high values, thereby fueling the hawkish expectations of investors. Judging by the reaction of the market, traders came to the conclusion that the glass is still half full, and not vice versa. Therefore, the September figures were de facto in favor of the pound, despite the “red color”.

Thus, the general consumer price index on a monthly basis came out at 0.3% with a forecast of growth to 0.4% (the previous value was 0.7%). In annual terms, the overall CPI was at 3.1%, while analysts expected to see it at the level of August, that is, at 3.2%. The core index, excluding volatile energy and food prices, also fell a little short of the forecast level. Instead of the three percent mark, it came out at 2.9%. It should be noted here that this result is still very, very good – the last time (except for the August release) core inflation in the UK was at such heights almost ten years ago – at the beginning of 2012. Therefore, in this case, the “red color” of the component can be safely ignored. But the retail price index came out in the green zone” – both monthly and annualized (0.4%, 4.9% with a forecast of 0.2%, 4.6%).

In general, the September figures retreated from the August highs. But here it is necessary to recall due to which “bonuses” British inflation shot up in the last month of summer. The fact is that last year there was a stimulating program “Eat Out to Help Out” in the country, which “lured” citizens to restaurants, cafes and pubs. The authorities wanted to help the affected catering sector, so they actually paid a substantial discount, up to 50%. As a result, the prices of food in cafeterias and restaurants have sunk significantly. This program operated for a short time – literally from mid-July to the end of August. Prices have increased this year, but the gap with last year’s low prices turned out to be significant. If we consider the structure of the August release, we can conclude that the growth of prices in cafes, pubs and restaurants accounted for the lion’s share of the growth in the consumer price index year-on-year. Naturally, in September 2021, the influence factor of the “Eat Out to Help Out” program no longer worked, since its operation ended on August 31, 2020.

This, in particular, explains the fact that today’s release did not reach the forecast levels. But, I repeat, even taking into account the red zone, inflation indicators (especially for the core index) remain at a fairly high level. In addition, many analysts expect another surge in inflation in October-November, primarily due to rising utility prices and a partial increase in value-added tax. That is why, after some thought, GBP/USD traders decided to use the pair’s downward pullback as an excuse to open long positions.

The downward pressure on the pair today was exerted by political news. It became known that relations between Paris and London have strained again. The official representative of the French government said that his country could announce sanctions against Britain on Friday for non-compliance with the Brexit agreement and fishing agreements. France has stated that the United Kingdom is effectively blocking the work of their sailors. Paris in an ultimatum demanded to resolve this issue by the end of the working week. The prospects of a trade war a priori cannot please investors, so the bulls retreated from the reached highs. However, according to the European press, consultations between London and Paris on the “fishing issue” are still ongoing. At the same time, it is noted that the bellicose statement of the representative of the French government should be perceived in the context of “negotiation tactics”. And here it is also necessary to remember that the French throughout the “Brexit epic” took the toughest position towards the British compared to the rest of the members of the European Alliance.

Such a contradictory fundamental background suggests that bulls of the GBP/USD pair still have a “power reserve” to the main resistance level of 1.3912 (a five-week high, which was reached on September 12), but no more. Due to the inertia of the inflation release and hawkish expectations, the pound may test the above target in the medium term. If the GBP/USD bulls fail to gain a foothold in the area of the 39th figure (judging by the previous downward pullbacks, this is the most likely option), short positions with the main target of 1.3800 (the average line of the Bollinger Bands on the W1 timeframe) will again be in priority.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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