- Sterling was temporarily left faltering against the dollar and the euro after data from the Office for National Statistics indicated UK inflation rose more than expected in the September.
- This result did little on its own to dissuade the Bank of England from raising interest rates aggressively next month.
- For the third day in a row, the price of the GBP/USD currency pair is subjected to selling operations that pushed it towards the 1.1184 support level before settling around the 1.1225 level at the time of writing the analysis.
UK inflation returned to double-digit percentages in September after rising from 9.9% to 10.1% against the consensus of economists who had been eyeing a higher pace of annual price growth to 10% last month. More importantly, core inflation also rose at the same speed when it registered 6.5% for the month of September after economists, on average, estimated that inflation rose from 6.3% to 6.4% when energy and food items were removed from the basket of goods for which prices are measured. Commenting on this, James Smith, developed markets economist at ING says: “UK inflation is back in double digits again, 10.1% is the highest in 40 years. But we think we are only partly away from the peak now.”
“Although in theory you could make a hard-line case for the Bank of England, in practice it is likely to be the opposite. The dramatic reduction of fiscal support by the new chancellor will be seen as lowering inflation in the medium term,” he added.
Wednesday's data on its own does little to deter the Bank of England from responding in November with a massive increase in interest rates. They were raised to 2.25% in September which many economists expect will rise to around 4% by the first months of the new decade. However, some economists say this may be less likely now after the recent game of musical chairs at HM Treasury, which this week led to much abandonment of the September budget plan in favor of a return to "austerity".
This leaves the British economy on course for a barely easing contraction which the August monetary policy report suggested could last for up to five quarters. “Looking ahead, we continue to expect the headline CPI inflation to rise to nearly 11% in October, mainly due to a 27% increase in consumer energy prices,” says Samuel Tombs, chief economist at Pantheon Macroeconomics.
“But the headline rate should drop to about 9% in the first quarter, as the memory of significant increases in food and motor fuel prices has been reached,” he added.
GBP/USD Forecast
According to the performance on the daily chart below, the GBP/USD break of the 1.1180 support level will support the bears to move further downwards, and the last performance confirms our view of the currency pair to sell from every bullish level. As political and economic anxiety in Britain continues to negatively affect any sterling gains.
The currency pair will not revive, the pace of the dollar's gains will be halted, and quick and bold measures from the Bank of England and the British government will increase investor confidence in the sterling. Currently, the bears' closest targets are the 1.1180, 1.1090 and 1.1000 support levels, respectively.
On the other hand, and over the same time period, it will be important to break the resistance levels at 1.1370 and 1.1600, respectively, to control the bulls.
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