GBP/USD Pauses at Lows Before US CPI

The pound edged higher against the dollar on Tuesday, holding just above its recent lows ahead of Wednesday's US inflation data.

Cable had been trading around 1.3225 in early Tuesday trade as the dollar eased back from last week's 18-month high, with Treasury yields and oil prices both cooling. The pair has been stuck in a tight range near three-month lows since the start of October, and Wednesday's CPI release could decide which way it breaks.

Latest Market Moves

•        GBP/USD firmed to around 1.3225 on Tuesday morning, still close to the three-month low it hit at the start of October.

•        The US Dollar Index slipped to around 102.35, pulling back from its highest level in 18 months.

•        EUR/USD rebounded to around 1.1175 in the European morning, bouncing off a 17-month low.

•        USD/JPY eased to near 158.20, with the dollar weakest against the yen among the majors.

•        Gold edged up towards $4,200 an ounce as crude prices and the US 10-year Treasury yield both eased.

CPI Expected to Run Hotter

Wednesday's September CPI report is expected to show headline US inflation climbing again on the back of the energy shock.

Consensus is for annual inflation to rise to 3.7% from 3.4% in August, with prices up around 0.6% on the month as gasoline costs jump. Core inflation, which strips out food and energy, is expected to be far tamer at around 2.4% to 2.5%, with the monthly core reading seen slowing to 0.2%.

That split matters for the dollar. The headline number will grab attention, but a soft core reading would back the view that this is an energy story rather than a broader inflation problem, with the data due at 13:30 UK time.

Is October Off the Table?

Markets have largely written off a Fed rate hike at the October 27-28 meeting.

The CME FedWatch tool shows roughly an 80% chance the Fed holds rates at 3.75% to 4.00% this month, a sharp turnaround from late September when a hike was seen as around 70% likely. Hike bets faded after September's payrolls report showed just 29,000 jobs added and August's PCE inflation came in below forecasts.

October isn't completely off the table, though. With roughly a one-in-five chance still priced, a hot core reading on Wednesday could quickly revive bets on a move, and Fed Chair Kevin Warsh has already said inflation has been “too high for too long.”

December Hike Priced After the Midterms

The bigger bet is on December, after Americans go to the polls in the November 3 midterm elections.

FedWatch puts the odds of a hike at the December 8-9 meeting at around 85%. Minutes from September's meeting showed most officials judged that another increase “would likely be appropriate by year end.”

That leaves the dollar with a hawkish tailwind into year-end, which helps explain why cable's rebound attempts have struggled to gain traction since September.

Burnham Puts an EU Reset on the Agenda

On the UK side, Prime Minister Andy Burnham has put closer ties with the EU back at the centre of policy.

In a statement to MPs, Burnham said he wants a package of new deals at the UK-EU summit in Brussels on November 20, which he said could be worth around £10bn a year to the economy by 2040. “Sticking with the status quo is not good enough for Britain,” he said, adding that a successful summit is the “immediate priority.”

Talks cover food and agricultural trade, energy cooperation and illegal migration, and Burnham has not ruled out a future manifesto that includes rejoining the EU. Closer trade ties could offer the pound some longer-term support, although so far sterling has taken its lead from oil, inflation and borrowing costs rather than Brexit headlines.

On the data front, Bank of England policymaker Megan Greene speaks later on Tuesday, and UK GDP figures for August are due on Thursday.

Cable Coils Above Key Support

On the 8-hour chart, GBP/USD has been squeezing into a tightening triangle just above key support.

The pair slid from near 1.3670 in late August to around 1.3180 by the start of October, and has since traded in a pattern of lower highs from around 1.3300 and higher lows. Below that sits the 1.3150-1.3165 support zone, which marked the June lows and launched the summer rally.

RSI has recovered to around 51 and is approaching a resistance line that has capped momentum since early September, so a break there would hint at a move out of the top of the triangle towards 1.3300. A drop through the lower edge would instead put the June support zone back in play.

Source: SpreadEx | GBP/USD, 8-Hour Chart