UK CPI Data Mislead Markets Today

This morning at 2 am Eastern Time, the Office for National Statistics reported the latest monthly round of Consumer Price Index (CPI) and Core CPI increases within the United Kingdom’s economy. Annual CPI, which had been forecasted to hit 10.7%, instead jumped by an astonishing 11.1%, making for another multidecade high; annual Core CPI also surpassed expectations, reaching 6.5% instead of the anticipated 6.4%. Because higher-than-expected inflation numbers tend to prompt central banks to raise interest rates to cool their respective economy in response, the Pound rose on the news accordingly, with traders welcoming the bullish indicator. However, it seems quite plausible that the UK CPI data mislead markets today, because these high figures are not due to traditional economic overheating.

A more fitting target for the blame is the slew of supply side issues stemming from the wartime energy crisis and clunky access to import commodities, driving up food and gas prices. This is why Core CPI in the UK has thus far only increased by a little over half that of CPI, and why the UK’s GDP is contracting, not expanding. These structural issues cannot be resolved merely by a central bank restricting demand vis-à-vis interest rate hikes; rather, either some combination of domestic production and trade must be reconfigured, or many of these tragic conditions must simply be endured, even in the form of stagflation. Whatever comes to pass, this particular kind of high inflation is ominous, and may perhaps be more appropriately filed as bearish for GBP upon a closer look.

Two Potential Pairs to Sell

For those who are looking for opportunities to short the Pound, the following two pairs are viewed favorably for GBP bears by the EdgeFinder, A1 Trading’s handy market scanner. They are listed below with their respective ratings, signals/biases, and corresponding charts. GBP/NZD is perhaps especially worth watching, as the Kiwi Dollar displays impressive fundamentals.

1) GBP/NZD (Earns a Score of -8, or a ‘Strong Sell’ Signal)

UK CPI Data Mislead Markets Today
UK CPI Data Mislead Markets Today

2) GBP/CHF (Earns a Score of -3, or a ‘Sell’ Signal)

UK CPI Data Mislead Markets Today
UK CPI Data Mislead Markets Today
New UK PM, New Fundamentals

The next Prime Minister of the United Kingdom has been decided: Rishi Sunak, former Chancellor of the Exchequer in Boris Johnson’s administration, has won the ruling Conservative Party’s leadership election by default. Having previously sounded the alarm against Liz Truss’ debt-financed tax cuts while running against her in the last leadership race, his efforts to avoid such fiscal stimulus amid historic inflation rates proved prescient. The Pound jumped in value accordingly upon the news of his win; financial markets appear to be hoping that with the new UK PM, new fundamentals will follow.

Is GBP Bearish Momentum Over?

It seems plausible that GBP could experience increased buying pressure over the short term, particularly in response to a PM that veers away from money-printing during high inflation. However, the core problems plaguing the Pound and the British economy remain regardless: a timidly hawkish Bank of England, the looming energy crisis, messy trade, and impending stagflation are not things that a new PM can fix single-handedly. In terms of fundamentals, it currently seems more likely that the GBP bearish trend will ultimately continue, perhaps even falling below parity with USD.

Best Pairs to Watch

For those interested in shorting the Pound, there are no pairs currently ranked favorably for GBP bears by the EdgeFinder, A1 Trading’s handy market scanner; this is fitting, considering the likelihood of GBP finding short-term bullishness. However, if GBP bearishness continues upon encountering fresh resistance, the following two neutral pairs currently lean less in the Pound’s favor, which traders can consider for the future. They are listed below with their respective ratings, signals/biases, and corresponding charts.

1) GBP/USD (Receives a -2, or ‘Neutral’ Signal)

New UK PM, New Fundamentals
New UK PM, New Fundamentals

2) GBP/NZD (Receives a -2, or ‘Neutral’ Signal)

New UK PM, New Fundamentals
New UK PM, New Fundamentals
The Case Against the Pound

Today (Friday, October 14th) has been full of historic and turbulent decisions within the United Kingdom. Chief among them include the official end of the Bank of England’s (BoE) emergency bond-buying intervention scheme, as well as Prime Minister (PM) Liz Truss’ decision to fire Kwasi Kwarteng from his role as Chancellor of the Exchequer. He had only served in the position less than six weeks; his time in office is the second shortest ever for a Chancellor. With the UK’s economy now taken off of monetary policy life support, and a former foreign minister named Jeremy Hunt now appointed the new Chancellor, both the BoE and the PM are hoping for a fresh start. However, GBP bearishness only looks ever more compelling; let’s explore five crucial points of consideration as we evaluate the case against the Pound.

1) No More BoE Intervention

Towards the end of September, following the now-former Chancellor’s ‘mini-budget’ announcement that included debt-financed plans for energy bill subsidies and stimulus via tax cuts, GBP plummeted in value. The selloff saw the Pound reach never-before-seen lows against the US Dollar, nearing parity; to contain the selloff and prevent an implosion of the UK’s financial system, the BoE jumped into action. Buying bonds in order to inject new liquidity and project some semblance of economic optimism for wary financial institutions, the monetary rescue mission has worked, at least to an extent. However, this program ends today; now that the BoE is withdrawing its palliative aid, there is ostensibly nothing preventing another GBP selloff.

2) PM Truss’ Untimely Vision

While PM Truss may be nominally taking steps in a better direction, e.g., walking back certain tax cut provisions and appointing a new Chancellor, these gestures may be more tokenistic than substantive. This is because her whole underlying vision for the UK’s economy is incongruent with current circumstances: attempting to use fiscal stimulus to spur growth in the midst of 40-year inflation highs is almost nonsensical, contrasting both Keynesian and Austrian theories on economics. Even if she affirms a couple budgetary changes, there are few signs that she is relenting from expansionary policy in general, the key catalyst that prompted the GBP selloff.

3) UK Energy Insecurity

A central component of GBP’s bearish fundamentals is the energy crisis the UK is facing, similar to that of mainland European countries. The crux of this problem is that Britain’s shockingly high inflation rate, currently 9.9% year-over-year, is not just due to economic overheating post-stimulus, but is also caused by restricted energy supply and high global prices in the aftermath of sanctions with Russia. This supply-side problem cannot be fixed with hawkish monetary policy, forcing the UK’s government to choose between partially subsidizing energy bills with money printing, or potentially letting energy costs increase manifold, devastating consumers. Neither of these solutions can solve the underlying issue, and both contribute to Pound weakness.

4) Post-Brexit Instability

Another risky factor underpinning the fragility embedded within the UK’s financial system is uncertainty post-Brexit. With trade policy still in a state of flux upon leaving the EU, the UK’s economy was already in a delicate position in the eyes of potential investors. Now the UK is facing the same crises without the extra layer of financial security that comes with being an EU member, all while it is still finding its new footing on the world stage. Market sentiment may continue to assess that British equities, bonds, and the Pound are thus too risky to go long on, opting to further short GBP and other securities instead.

5) Empirical Forex Data

The Case Against the Pound

On top of these bearish fundamentals, institutional sentiment and market activity currently corroborate a bleak outlook for the Pound. According to the most recent Commitments of Traders (COT) data, 68.53% of institutional traders are selling GBP against other currencies, an increase of 4.55% over the previous week. Because financial institutions contribute significantly to price action and market volatility in forex, this institutional GBP bearishness has reflected in the markets accordingly. As depicted in the GBP/USD chart above, we have yet to see a breakout to the upside above trendline resistance on the 1-day timeframe (though a higher low has been found at the 1.10 level, before the bond-buying scheme finished).

A Grim Conclusion

The Case Against the Pound

From the standpoint of both fundamentals and sentiment analysis (as well as some technical analysis), a return to GBP bearish momentum seems quite plausible. While the fate of GBP minor pairs appears to be less clear, A1 Trading’s EdgeFinder tool, a market scanner that offers helpful supplemental analysis, rates GBP/USD at a -6, earning a ‘strong sell’ signal.

Key Takeaways

• Today has been historically significant for the UK’s fragile economy: the Bank of England’s emergency bond-buying program wraps up, and Chancellor of the Exchequer Kwasi Kwarteng has been fired. The case for GBP bearishness is quite a compelling one.
• First, the Bank of England’s quick monetary intervention to save GBP from collapsing ends today. With their policy efforts having briefly saved the Pound from dire sentiment and fundamentals, the primary measure of security for GBP’s value in forex is now gone.
• Second, while UK Prime Minister Truss has made some budgetary concessions, such as walking back the extent of her tax cuts, her underlying policy agenda is barely changed. Considering her vision was the catalyst for the GBP selloff, this is bad news.
• Third, the UK faces an energy crisis similar to that of mainland Europe, forcing the government to choose between debt-financed subsidies or devasting, near-unaffordable energy bills. Neither option is good for GBP, nor can be fixed by curbing demand via rate hikes.
• Fourth, the problems afflicting the UK’s precarious financial system are exacerbated by post-Brexit difficulties. Without the extra layer of economic protection brought by the EU, financial markets may judge GBP and UK stocks and bonds to be too risky to buy.
• Fifth, besides fundamentals, institutional sentiment and price action appear to confirm this bearish narrative for GBP. Over 68% of institutional traders are now shorting GBP against other currencies, and GBP/USD has yet to break out above key resistance.
• In conclusion, at best the Pound does not appear to be worth buying; at worst, market conditions look incredibly bearish for the currency, and for the UK’s economy in general. Currently, GBP/USD receives a ‘strong sell’ signal from the A1 EdgeFinder as well.

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