Nothing Can Save the Pound, Except Politics

Posted Tuesday, October 18, 2016 by
Skerdian Meta • 2 min read

There´s no rest for the wicked; the Pound doesn´t seem to be able to go through a trading session without going through some emotional disturbance. Judging by the price action after the inflation report we can loudly say that the forex market doesn´t give a rat´s bottom about the economic situation in the UK, if anything, any rally induced by the positive data or by market expectations is a great opportunity to sell GBP pairs before the market slaps it down again. 

The UK inflation report just a while ago was great, apart from the PPI (producer price index). Even the PPI wasn´t really bad, it came out just flat. That shows that inflation hasn´t picked up due to the weaker Pound, because the import prices which the UK producers pay for whatever materials they use for production remained flat.

All the other elements of the report show a pickup in the inflation. The CPI (consumer price index) which is the main inflation measure jumped from 0.6% to 1.0% and the core CPI which strips out energy and building materials beat the expectations as well. This means that although the oil prices have gone up and the house prices across all the UK have surged which affect the headline CPI number, there´s inflationary pressures within the domestic economy as well. In normal times this would be a very bullish signal for the pound.   

Speaking of house prices, the 8.4% jump in the yearly figures cools off any worries that the housing market would collapse after the Brexit vote. That´s another bullish signal; in fact, this report is full of positive signals, but the Pound couldn´t keep its head high. GBP/USD tumbled more than 50 pips after the release. The forex traders closed all their buy positions that they opened during the night in this forex pair. They bought the rumours/expectations of higher inflation, now they are selling the fact. 

But, that wasn´t the end for the GBP, politics came to its rescue. Bloomberg posted a comment after the release of the inflation report, apparently from the UK government attorney saying that Brexit needs to be ratified by the parliament. This exact comment is the reason for the 55 pip jump in GBP pairs after it initially declined after the inflation report. It later turned out that the parliament will vote the EU/UK agreement after Brexit. So, the market got all excited over nothing. At least, it helped the Pound, because the economic data doesn´t seem to be able to.

I´m not opening a long term sell forex signal in GBP/USD yet, because I don´t really like the risk/reward ratio. As you might have noticed, I don´t really like to take too much risk. After all, we´re in this business to make some pips, not for the thrill and excitement of trading. As I said in my previous update, the 1.26 level is where my eyes are.     

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