GBPCAD: Inflation is still the key to FX movement

The Sterling fell soon after the release of UK inflation data which was largely in line with expectations, but some key elements of the report were softer and this could ultimately prove to be supportive of the currency. GBPUSD is trading at around 1.2250 at the time of writing. The annual inflation rate in the UK increased to 9.1% y/y in May 2022 from 9% y/y in the previous month, the highest since 1982. On a monthly basis, consumer prices rose 0.7% m/mabove expectations of 0.6% m/m, with the main upward pressure coming from food and non-food prices.

Core CPI It grew 5.9% y/y in May, below market expectations of 6% and below the 6.2% in April. The core month-on-month reading came in at 0.5% m/m down from 0.7% previously and consensus expectations for 0.7%. The data is likely to prompt the BOE to raise rates soon, with the option for a 25 bps rate hike at its next meeting in August rather than upping the stakes with a 50 bps hike. The GBPUSD pair remains under pressure despite its latest rebound from 2-year lows at 1.1932.

Meanwhile, Canada will also report its monthly CPI later today. In the previous report, Canada’s annual inflation rate increased to 6.8% y/y in April 2022, the highest since January 1991 and slightly above market expectations of 6.7%, driven by food and shelter as the Russian invasion of Ukraine continued to press energy and commodity prices. On a monthly basis, consumer prices rose 0.6% m/m, slightly above the 0.5% forecast, but easing from the 1.4% jump in March. In this report, consensus stands at 1% m/m.

Canada’s CPI inflation figure for May will be important, as investors will be looking for clues to justify a potentially more aggressive rate hike from the BOC next month. Given the unexpected spike in inflation elsewhere, an upbeat report in Canada should come as no surprise, and likely make for a big rate hike, as the economy is already running hot.

Technical Overview

Last week GBPCAD rebounded from the oversold point of 1.5482 and managed to gain more than 1%. However, the bearish trend that has been going on since the beginning of the year still looks very steep, although an attempt to bounce back after recording a 6-year low could be an important indication of the direction of the next move.

GBPCAD, H8

If the intraday bullish flags above the support at 1.5776 are validated, then the price projection for the GBPCAD pair will test the resistance at 1.6181 or at least land at the FE61.8% level at 1.6122 (from a drawdown of 1.5482-1.6006 and 1.5798). This would mean the minor resistance 1.6066 is broken. However, as long as the price only moves below the minor resistance 1.6006 the prospect will remain in the range of consolidation. A move below the 1.5776 minor support would bring the bias to the downside again.

In the medium term, the resistance at 1.6181 is important to watch, because a break of this level could confirm a rebound at 1.5482 and the price rally will reach higher retracement levels. As long as the price is below 1.6181, There will be no change in the direction of the price.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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