Cable off Highs ahead of UK CPI, FOMC Minutes

A weaker dollar has helped cable reach near multi-month highs ahead of key UK economic data, which could determine whether the BOE follows the Fed's rate hike.

What's Moving the Market

• UK unemployment is softer than expected, with markets expecting July CPI to ease as well.
• Traders are looking at the timing of BOE and Fed hikes to gauge the cable outlook, as US economic figures disappoint while UK data has been better than expected.
• FOMC minutes to focus on the number of hawks who didn't join the dissenters at the last meeting, but within the context of softer jobs data.
• If the Fed and BOE outlooks remain aligned, investor concern over the Autumn Budget could overshadow rate-gap considerations.

UK Growth and Fed Jitters

A batch of disappointing US data over the last couple of weeks has weighed on the greenback and given the cable licence to pop up to the highest level it's been since late May. Now, it's the turn from the British side, as markets await UK CPI data on Wednesday. On Tuesday, the UK unemployment rate was unchanged at 4.9%, instead of dropping to 4.8% as anticipated amid a slow-hiring, slow-firing environment. The development suggested more slack in the market than traders anticipated, making it less likely the BOE will hike as soon as expected. Ahead of the data, futures put the odds of a hike at the August meeting at just 30%, and they could vary with the upcoming data release. Headline July UK CPI is projected to accelerate to 3.0% from 2.6% in June, with the projected gain attributed mainly to routine adjustments in consumer energy prices. Excluding energy and food, the core rate is projected to tick down to 2.5% from 2.6%. A softer reading could leave markets putting off the expected hike until the end of the year, while a beat is likely to reverse cable's move earlier in the week and put it back on course towards the key 1.3600 handle.

Later in the day is the release of FOMC minutes in the US, which will likely be interpreted in a new light following the drop in hiring last month and the cooler-than-expected wholesale prices reported last week. The odds of a Fed hike in September have been steady since the data came out, around one-third in support, while two-thirds expect a hold. At the last meeting, three members dissented hawkishly, and traders will be keen to see whether the new data can sway their reasons. The main issue is likely to be counting the strength of hawks and doves, as many more members could have hawkish views but didn't go so far as to dissent. A smaller number of hawks or members who advocated hikes made positive comments about the labour market, which could leave markets with the impression that the Fed will hold for longer. If members supported hikes despite weakness in the jobs market, the interpretation is likely to be hawkish.

Cable Waiting For the Timing

Both the BOE and the Fed are expected to hike rates by the end of the year, keeping the interest rate gap unchanged. The currency pair's direction will largely depend on timing. If one central bank hikes rates later than the other, it would be on a slower upward path, likely weighing on that currency. However, economic growth could overshadow the effect by driving capital flows. The pound also gained this month after the UK economy grew faster than expected while the US economy underperformed expectations. If the outlook for the BOE and the Fed remains fairly aligned, market attention could turn towards expectations for the Autumn Budget.

GBPUSD: Double Top or Breakout?

Despite rising from under 1.3300, the pound has met resistance at 1.3560, which could lead to a double-top rejection towards the lower VWAP at 1.3316 if the middle VWAP line at 1.3463 gives way to bears. However, a break higher would open the door to the 1.3660 peak, which might initially act as neckline resistance of a longer-term double bottom that might have formed near 1.3150.

Source: SpreadEx | GBPUSD, Daily Chart