GBP/USD - Lower highs, lower lows ahead of UK CPI release, politics to overshadow economics?

Friday’s UK election disaster pushed the GBP/USD pair well below 1.2769. The currency pair remained on the back foot on Monday. The daily chart now shows lower highs, lower lows pattern (falling channel) pattern. 

UK CPI due at 08:30 GMT

The cost of living as represented by the consumer price index (CPI) is seen rising 0.2% m/m in May, compared to a 0.5% rise in April. The annualised figure is seen unchanged at 2.7%. The core inflation is seen rising 2.4%. 

The inflation continues to remain above the BOE’s 2% inflation target. The economists have long said that the central bank is unlikely to respond to imported inflation (rise in inflation due to weak Pound) and would only consider raising rates if the pickup in wage growth leads to higher prices in the short run. 

However, raising rates is even more difficult now given the political instability. Consequently, the British Pound is unlikely to strengthen significantly on the back of a strong CPI number. On the other hand, a weaker-than-expected inflation print would go well with the lower highs, lower lows formation and open doors for a bigger sell-off to 1.25 handle. 

It appears that the political development in the UK would continue to overshadow economics. Industry groups - CBI and EEF have called for Brexit strategy rethink. 

GBP/USD Technical Levels

The spot traded around 1.2650 in Asia. A break below 1.2620 (100-DM) would expose 1.2580 (200-DMA) and 1.2578 (50% Fib R of 1.2109 - 1.3048). A daily close below the same would open doors for 1.2365 (Apr 7 low). On the higher side, breach of hurdle at 1.2689 (38.2% Fib R of 1.2109-1.3048) could yield a revisit to 1.2813 (50-DMA) and 1.2843 (10-DMA).

The daily RSI is yet to hit the oversold territory, thus a potential for further sell-off in the pair.