UK Inflation Soars, GBP/USD Nears a Six-Week High, All Eyes on the Fed

GBP/USD - PRICES, CHARTS, AND ANALYSIS

• Headline UK inflation rose to 10.4% from 10.1% in January.

• Will the Bank of England (BoE) consider a 50bp hike tomorrow?

• The Fed is expected to announce a dovish 25bp rate hike later today.

Headline UK inflation broke a three-month trend and rose in February, rising to 10.4% y/y compared to 10.1% y/y in January and market expectations of 9.9%. Core inflation also rose sharply to 6.2% from 5.8% and half-a-point above market forecasts.

According to The Office for National Statistics (ONS), ‘The increase in the annual inflation rate in February 2023 mainly reflected price rises in the restaurants and hotels, food and non-alcoholic beverages, and clothing and footwear divisions. These were partially offset by downward effects coming from recreation and culture, and from motor fuels within the transport division.'

UK inflation is expected to move sharply lower at the end of Q2, due to lower energy costs, and was recently forecast to hit 2.9% by the end of the year by the Office for Budget Responsibility (OBR).

Today’s numbers break a three-month trend of declining inflation in the UK and will add pressure on the BoE to hike interest rates by at least 25bps and maybe even 50bps at tomorrow’s MPC meeting. The UK has so far been immune to the recent global banking crisis but concerns remain that any further bank run may curtail economic growth sharply as banks curb their lending activity.

Cable has pushed higher after the inflation release, buoyed by higher market rate hike expectations. The pair are looking to test the recent double high around 1.2283 before 1.2292 comes into play. Above here, 1.2448 becomes a medium-term target.

Later today we have the latest US monetary policy decision (18:00 GMT).

Current expectations are for the Fed to raise interest rates by 25 basis points and give a dovish narrative at the press conference. Any change from expectation will see the US dollar, and cable, move sharply.

GBP/USD DAILY PRICE CHART – MARCH 22, 2023

RETAIL TRADERS PAINT A MIXED PICTURE

Retail trader data show 47.38% of traders are net-long with the ratio of traders short to long at 1.11 to 1.The number of traders net-long is 11.84% higher than yesterday and 2.50% lower from last week, while the number of traders net-short is 18.19% lower than yesterday and 9.48% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net short.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Written by Nick Cawley, Senior Strategist for DailyFX