The pair is down 0.4% on the day to 1.1878 at the moment and is poised for a third straight day of declines. The bounce higher after the US CPI data last week failed to breach the key trendline resistance (white line) and it has been one-way traffic since as the dollar recovers strongly through to this week.
On the pound side of the equation, we saw UK GDP suffer a contraction in Q2 and annual consumer inflation hitting a 40-year high above 10% in the past week. Retail sales data was slightly better today but it isn’t as much comfort as the economic outlook remains rather dire to say the least.
The BOE has a fine balancing act to do and odds are, if the data worsens further in the months ahead, there is every chance we could see the door slowly being shut for the central bank to tighten policy further.
Considering that both central banks already gave a formal message that we are in the second-half of the tightening cycle, the trade for cable is very much a case of who folds first? The Fed or the BOE? In this instance, it looks very much like the latter.
As such, the path of least resistance is for the pair to move lower – all else being equal. Now, with the dollar picking up steam across the board, the next test is 1.1800 and the year’s low at 1.1759.