UK inflation accelerates in April, Sterling sinks

May 16, 2017 09:38 AM

Sterling tumbled lower on Tuesday following reports of UK consumer prices jumping to 2.7% in April, the highest level since September 2013. It is becoming quite clear that the Brexit-fuelled currency weakness has elevated inflation to uneasy levels with consumers likely to feel the pinch if wage growth fails to keep up. Despite the rising prices, expectations of an interest rate increase in the short term remain subdued with uncertainty over Brexit and BoE doves playing a key part. The Bank of England may receive further headaches in the future with the combination of rising inflation and slowing economic growth weighing heavily on sentiment.

Sterling/dollar is under pressure on the daily charts as bulls are struggling to keep above 1.2900. An intraday breakdown below 1.2850 should encourage a further depreciation lower towards 1.27750.

Dollar bulls missing in action
The Greenback entered the trading week under renewed selling pressure as the amalgamation of political tensions in the U.S. and soft economic data impeded investor attraction towards the currency. Sentiment towards the Greenback took another hit on Monday after sellers exploited the surprisingly soft U.S. manufacturing report to enforce further downside pressures. With the dollar descending to its lowest level at 98.50 since Donald Trump’s presidential victory in November, the Trump rally could be on its last leg. While heightened expectations remain over the Federal Reserve raising U.S. interest rates in June, the ongoing uncertainty revolving around Trump may ensure dollar bulls remain missing in action. From a technical standpoint, the Greenback is bearish on the daily charts with weakness below 98.50 opening a path towards 98.00.

EUR/USD breaks above 1.1000
A recent relief of political risk in Europe has rekindled appetite for the euro with prices lurching to a fresh six-month high at 1.1040 as of writing. With Emmanuel Macron’s victory in the French Presidential election dealing a symbolic blow to populism and quelling fears of “Frexit”, investors have redirected their attention back towards the macroeconomics in Europe. The overall data from Europe in recent months has displayed a touch of resilience and it will be interesting to see how the improving macro-fundamentals and Macron’s victory impact the ECB meeting in June. euro bulls seem to be back in town with a vulnerable dollar fuelling the upside rally.

From a technical standpoint, the breakout above 1.1000 has turned the euro/U.S. dollar (EUR/USD) currency pair bullish on the daily charts. A daily close above 1.1000 should encourage a further appreciation towards 1.1120.

Commodity spotlight – gold
A vulnerable dollar supported gold on Tuesday with the metal finding comfort around $1,235 as of writing. Although U.S. interest rate hike expectations are likely to dictate where gold trades to in the medium to longer term, uncertainty, and geological tensions should support the metal in the short term. Persistent dollar weakness should encourage short-term bulls to send prices above $1,235. A breakout above $1,235 may provide permission for buyers to send prices higher towards $1,245.

About the Author

Lukman Otunuga is an FXTM research analyst