Inflationary pressures intensify in the UK economy

The USD continued to weaken yesterday and during today’s Asian session against its counterparts and greenback fundamentals increasingly include US President Trump’s tax cut and spending bill which is being subjected to an intense stress test in Congress. There seem to be Republicans in Congress opposing the bill while Democrats say that it favours the wealthy and cuts needed social programs. On a fiscal level and given the budget deficit, the ballooning US national debt and its increasing costs, another tax cut may not be the way to go at the current stage. Overall, the political uncertainty and the uncertainty for the US economic outlook tend to weigh on the USD for the time being.

On a technical level, we note the clear weakening of the USD against the JPY allowing USD/JPY to break clearly the 144.50 (R1) support line now turned to resistance. Yet the pair also broke the upward trendline that was guiding it since the 22nd of April signalling an interruption of the past upward motion of the pair. Given also the pair’s losing streak for the past six days and the fact that the RSI indicator has dropped below the reading of 50 implying the building up of a bearish sentiment among market participants we turn towards a bearish outlook for the pair at the current stage. Should the bears maintain control over the pair as expected, we note the 141.75 (S1) support line as the next possible stop. For a bullish outlook to emerge we would require the pair to reverse its last week’s losses, thus has to reverse direction break the 144.50 (R1) resistance line and continue to also break the 148.20 (R2) resistance level.

Across the pond we note the beyond expectations acceleration of the UK CPI rates for April. The rates on a headline level, reached 3.5%yy if compared to March’s 2.6%yy, while on a core level, accelerated to 3.8%yy if compared to 3.8%yy, so there seems to be some depth in the intensification of inflationary pressures in the UK economy and it’s not only an issue of costlier fuels. The release tended to provide some support for the pound at the time of the release and market attention now turns towards BoE, as the pressure increases for the bank to ease on its dovishness. Please note that in the latest interest rate decision of the bank, two monetary policy committee members dissented from voting for the rate cut and we may see the power struggle within the bank now intensifying. Should we see BoE policymakers in the statements remaining dovish, the pound may lose ground while a hawkish shift could further support the sterling.

Technically cable is on the rise currently testing the 1.3435 (R1) resistance line. Despite the fundamentals favouring possibly the bulls, for us to abandon our sideways movement bias in a favour of a bullish outlook, GBP/USD would have to clearly break the 1.3435 (R1) resistance line and start aiming for the 1.3640 (R2) resistance line. Please note that the RSI indicator seems to have escaped the boundaries of the reading of 50 and is on the rise, implying an increasingly bullish market sentiment for the pair. For a bearish outlook to emerge, which we currently view as a remote scenario, we would require the pair to reverse direction, break the 1.3205 (S1) support line and thus pave the way for the 1.3010 (S2) support level.

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Today we note the release of ECB financial stability review in the European session. In the American session, oil traders may be more interested in the release of EIA’s weekly crude oil inventories figure while on the monetary front, Richmond Fed President Barkin and ECB Vice President De Guindos are scheduled to speak. Tomorrow’s Asian session may prove particularly interesting for JPY traders as we get Japan’s machinery orders for March the preliminary PMI figures for May and the Chain Store sales for April and the main event may prove to be the planned speech of BoJ board member Asahi as a possibly hawkish tone could provide substantial support for JPY and vice versa.