Rampant inflation dampens demand for sterling

Wednesday saw the UK CPI hit a 40-year peak at 10.1 percent year on year, stoking further recession fears and dimming sterling’s outlook as the Bank of England is now priced in for another 50bps rate hike.

Normally, such anticipation of further rate hikes would be seen as bullish for a nation’s currency, with a 0.5 percent rate increase expected at the next meeting on 15 September. However, traders and investors are more concerned about the overall state of the UK economy in a global economy that is seen to be faltering.

Part of that concern is also due to the lack of confidence in the Bank of England and the stewardship of Governor Bailey. Analysts deem Bailey to be ‘behind the drag curve’ and slow to respond to the inflation fears that have been evident in markets for the last 6-12 months.

All of this has had an impact upon the GBP crosses and the FTSE. This is an opportunity for us to view the technical picture of how markets reacted to yesterday’s CPI news and provide an insight into the overall health of the GBP.

The July FOMC Minutes released later in the session softened the blow after noting that participants felt the Fed could tighten more than necessary.

FTSE 100

Let’s start with a look at the FTSE 100 technical picture, as it may well be the clearest, at least in the sense of understanding where it stands in relation to recent price action.

When we look at the daily cash chart of the FTSE 100, we see that it is still firmly stuck in a range between 7000 and 7700. So far, the Big Round Number (BRN) of 7000 has provided firm support over the last year. On the upside, we have seen resistance between 7640 – 7700. In the last month we have seen the FTSE dragged higher, along with a wider bear market rally where the price has rallied nicely from 7160 to 7560.

However, this now leaves traders wondering if it has the energy to assault those recent highs of 7640 and above? The more global make-up of the FTSE 100 means the impact of the GBP weakness can inflate the index as companies’ overseas profits are boosted. With that in mind, let’s look at the GBP.

GBPUSD

The GBP crosses have provided little joy for GBP bulls in 2022, and we see no reason for that to end in the short term. In the case of the GBPUSD, that bearish trend has been exacerbated by the almighty strength of the US dollar.

From the highs of 1.4200 in June 2021 we have seen a steady decline in the GBPUSD, which has only accelerated in the last few months as the USD strength took hold. We have seen a total decline of approximately 2400 pips - from 1.4200 to 1.1800.  

Overall, the BRN of 1.20 has held as support, mostly, for the last two months. However, technical analysts would deem that we have a descending triangle building with 1.20 as the base. A concerted break of that level and subsequent close beneath it on the daily and weekly chart would be an ominous sign for a further decline in GBPUSD.

GBPCHF

Talking of descending triangles, our attention has been drawn to a larger one building in sterling versus the Swiss franc.

Looking at the GBPCHF monthly chart we can see looming a distinct Descending Triangle pattern, which has been building over the last 10-12 years. We have historically seen support in the 1.1500 region - we are presently trading below this point.

However, on a monthly chart we will reserve final judgement until this month’s candle closes in nine trading days. Nevertheless, it is once again an ominous sign that the GBP is trading down at decade lows against a safe-haven currency. This may well reflect not only UK/GBP weakness but overall sentiment for the global economy.

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