The initial reaction to the hot inflation data earlier was a higher pound, with GBP/USD rising to a high of 1.2802 but the move was a brief one as noted here. As mentioned then and earlier in the session, the data isn't going to change much for the pound and the UK rates outlook in the short-term.
Traders have already priced in a terminal rate of close to 6% coming into today and the bank rate is only at 4.50% at the moment, before tomorrow's expected rate hike. In other words, there is still a long way to go and who knows how things will play out on the inflation front in a couple of months' time.
We already saw how quickly markets can switch around in terms of central bank outlook, using the Fed as an example. Just over five weeks ago, we were still talking about three rate cuts and suddenly we're now talking about none by year-end for the Fed.
So, for traders to really front-run the UK inflation data today, is not exactly something that has strong conviction and we are seeing that play out.
The more persistent price pressure is also applying a further drag to the UK economy surely and that raises further risks of stagflation, something not really evident in the likes of the US and Eurozone at the moment. And that makes the pound also somewhat less attractive considering the circumstances.
GBP/USD has now fallen to 1.2705 as it fails to hold the push back above the 100-hour moving average (red line) earlier in the session. Sellers have wrestled back some near-term control but the bias is now more neutral, with price action trapped between the level above and the 200-hour moving average (blue line) at 1.2435.
A break below the latter will be a big blow to buyers, who were hoping to carry the recent momentum towards 1.3000 potentially. Looking at broader markets, the softer risk mood in general this week also isn't of much help to the pound. And with the possibility of a further risk rotation ahead of month-end and quarter-end, things could get a bit trickier in the days ahead.
