This week our currency strategists focused on the U.K. and U.S. CPI updates for potential high-quality setups in the British pound & U.S. dollar.
Out of the eight scenario/price outlook discussions this week, only one discussion arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay. The outcome of the U.S. CPI update was mixed, so we didn’t think there was a strong long or short setup in the Greenback based on that event.
Check out our review on the U.K. CPI discussions to see what happened!
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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GBP/AUD: Monday – January 13, 2025
GBP/AUD 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the U.K. CPI report and its potential impact on sterling. Based on our Event Guide, expectations were for the headline inflation rate to hold at 2.7% y/y (vs 2.6% previous), with core CPI expected at 3.4% y/y (vs 3.5% previous). With those expectations in mind, here’s what we were thinking:
The “Sterling Surge” Scenario:
If inflation came in hotter-than-expected, we anticipated this could dampen expectations for aggressive BOE rate cuts. We focused on GBP/CHF for potential long strategies if risk sentiment was net positive, especially given weak updates in Swiss unemployment data. In a risk-off environment, GBP/NZD long made sense given the RBNZ’s recent dovish economic signals from New Zealand and weaker commodity prices.
The “Sterling Slump” Scenario:
If U.K. inflation figures disappointed, showing notably cooler price pressures, we thought this could weigh on GBP. We considered GBP/AUD for potential short strategies in a risk-on environment, particularly given Australia’s recent strong employment data and China’s improving trade figures. If broad risk sentiment turned net negative, GBP/JPY shorts looked promising given the BOJ’s increasingly hawkish stance on potential rate hikes and the yen’s general “safe haven” status.
What Actually Happened:
The U.K. December CPI report showed a notable cooling in price pressures:
- Headline CPI dropped to 2.5% y/y (vs 2.7% forecast; 2.6% previous)
- Core CPI moderated to 3.2% y/y (vs 3.4% forecast; 3.5% previous)
- Monthly CPI rose 0.3% m/m (vs 0.4% forecast; 0.1% previous)
- Services inflation, closely watched by the BOE, fell to 4.4% from 5%
Market Reaction:
While there are concerns with the services inflation levels, the overall net outcome and the immediate bearish reaction fundamentally supported our GBP bearish scenarios, and with broad risk sentiment arguably leaning positive after improving Chinese data and slight USD weakness this week, GBP/AUD became our focus.
Looking at the GBP/AUD chart, we saw immediate selling pressure after the CPI release, with the pair breaking below S1 (1.9731). BOE policymaker Alan Taylor’s comments suggesting preemptive rate cuts to prevent a hard landing likely reinforced the bearish momentum.
The pair found some support near S2 (1.9610) during European trading, though weaker U.K. retail sales data (-0.3% m/m vs +0.2% forecast) later in the week made sure that Sterling stayed under pressure. Meanwhile, AUD possibly found fundie support from better-than-expected Chinese trade balance data (104.84B vs 85.0B forecast) and strong Australian employment figures (+56.3K vs +25.1K expected).
The Verdict:
So, how’d we do? Our fundamental analysis anticipated GBP weakness on disappointing U.K. inflation data, which played out as expected. While our technical analysis accurately identified key support levels at S1 and S2 that contained price action throughout the week.
For traders who entered short positions after the weak CPI data and dovish BOE comments, they could have captured a solid move lower. However, trade management would have been crucial given the choppy price action between support levels.
Overall, we think this discussion “highly likely” supported a net positive outcome as both fundamental and technical triggers aligned well, showing consistent bearish momentum and reaching multiple support targets throughout the week. The rapid deterioration in the U.K.’s economic outlook, coupled with Australia’s resilient data, provided a clear directional bias that played out in price action.
And even for day traders and scalpers, there were several opportunities for high quality short positions at the S1 Pivot area throughout the week.
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