Better Data Helping GBP

The British Pound is continuing its advance against the US Dollar this week. The UK currency has been on a steady run higher against the greenback since recovering off the September lows, fueled mostly by the weakness in the Dollar over that same period.

Better UK data of late has also provided support, however. We've seen recent PMI data sets continuing to improve, despite the return of lockdown measures in Q4. Additionally, while November GDP was seen contracting, the final result (-2.4%) was far less than the more than 5% dip forecast.

Inflation Rises in December

This week, GBP has been helped higher by a better-than-expected set of inflation readings for December. The data released over the European morning on Wednesday by the ONS showed that Headline CPI rose to 0.6% last month, doubling from the prior month's 0.3% reading and beating estimates for a 0.5% result. Core inflation, which strips out energy and food prices, was also seen advancing over the month to 1.4%. This reading was a marked improvement on the prior month's 1.1% reading and above the estimated 1.3% reading analysts were looking for.

Looking at the breakdown of the data, interestingly, the largest positive contribution came from recreation and culture which added 0.35%. rising transport costs added a further 0.11% while clothing added 0.10%. In terms of the biggest drag on consumer prices, this came from falling food and non-alcoholic beverage costs.

BOE Still Expected To Ease Further

Despite the better inflation data, with headline CPI still well below the BOE's 2% inflation target, there is still plenty of downside risk for GBP. Furthermore, with a full nationwide lockdown having commenced at the start of January and expected to run on until at least the end of February, the market is expecting that the BOE will announce further action when it meets on February 4th for the next MPC review, with negative rates flagged as one of the potential moves in consideration.

With the pandemic continuing to worsen in the UK there is still a great deal of uncertainty as to when restrictions will begin to ease. Daily deaths have hit fresh record highs this week and while new cases have started to turn lower, health authorities are warning that deaths will remain high in the near term and any easing of restrictions would be a disaster, meaning that, for the time being, the economy will continue to struggle under the weight of lockdown.

Technical Views

GBPUSD

Following a further downside test of the 1.3516 level, GBPUSD has found fresh support and is turning higher once again. While above here, the near term view is for an eventual break above the 1.3747 level, in continuation of the bullish channel which has framed the move off 2020 lows. however, bearish divergence in momentum studies is worth noting here and a downside break of 1.3516 could pave the way for a deeper correction.

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