UK Headline Inflation rises by Less Than Expected, GBP/USD Eyes US CPI

• UK headline inflation – 2.2% in July vs expectations of 2.3%.
• Cable consolidates above 1.2800, helped by US dollar weakness.
• US inflation data is released at 13:30 UK today.

UK headline inflation CPI) rose in July but at a slower rate than expected. CPI rose by 2.2% in the 12 months to July 2024, up from 2.0% in June 2024. On a monthly basis, CPI fell by 0.2% in July 2024, compared with a fall of 0.4% in July 2023. Core inflation fell from 3.5% to 3.3%, below expectations of 3.4%.

‘The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services where prices of gas and electricity fell by less than they did last year; the largest downward contribution came from restaurants and hotels, where prices of hotels fell this year having risen last year,’ according to the ONS. The closely followed CPI all services index rose by 5.2% in July compared to 5.7% in June and 7.4% in July 2023.

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UK rate expectations currently show a 45% chance of a second 25 basis point interest rate cut at the September 19th BoE meeting with the central bank seen cutting a total of 50 basis points between now and the end of the year.

The yield on the rate-sensitive UK 2-year gilt fell after the ONS data and is now closing in on the August 5th low at 3.475%. Below here the 2-year gilt yield would be back at levels last seen in April last year.

UK 2-Year Gilt Yield

Cable (GBP/USD) is trading comfortably back above 1.2800 today, aided partly by yesterday’s bout of weakness in the US dollar. GBP/USD tested and rejected the 1.2863 to 1.2896 zone yesterday and today with the market waiting for the US inflation data at 13:30 UK today before deciding on the next move for the pair. Short-term support at 1.2800 followed by 1.2787 (50-dsma) with further upside limited at 1.2896.

GBP/USD Daily Price Chart

Charts using TradingView

Retail trader data shows 42.40% of traders are net-long with the ratio of traders short to long at 1.36 to 1.The number of traders net-long is 15.32% lower than yesterday and 19.26% lower from last week, while the number of traders net-short is 19.79% higher than yesterday and 36.48% higher 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bullish contrarian trading bias.