London, UK Fleet Street view. Empty streets City of London during national lockdown. Covid restrictions, social distancing. Image source: ©Irstone © 123RF.com
The Consumer Prices Index (CPI) in the UK surged by 1.5 per cent last month, up from the 0.7 per cent that was reported in March. The numbers posted by the Office for National Statistics met the preliminary forecasts for steadily growing inflation.
The initial reaction of the British pound was to weaken amidst renewed fears of inflation getting out of hand. The CPI report was released just a day after the solid employment numbers for the same month, thus, adding to the underlying volatility.
EURGBP 1D Price Chart. Image source: Trendsharks ©, created with TradingView.com
The EURGBP continues to be the most interesting pair this week, given the major economic releases in the EU and UK. Today's data has added even more incentives for traders anticipating a new major move on the EURGBP.
As can be seen on the daily chart above, the EURGBP is forming a major Accumulation range, following the completion of the preceding Markdown. This behaviour of the price action is inlined with the anticipations of the Wyckoff Cycle Theory.
Accumulations and Distributions represent classic consolidation ranges that precede the establishments of major directional trends. In the current case, the completion of the Accumulation would likely indicate the beginning of a new uptrend.
Notice that the EURGBP did not break down below the lower boundary of the Accumulation after today's CPI data, which confirms these expectations. The price action is currently consolidating below the 50-day MA (in green), but once it manages to break out above it, it would be clear to probe the 23.6 per cent Fibonacci retracement level at 0.86552.
The latter is currently converging with the 20-day MA (in red), which represents a floating resistance. Once this threshold gets broken out above as well, the EURGBP would be ready to target the 38.2 per cent and the 61.2 per cent Fibonacci retracements.
Finally, the oversold Stochastic RSI indicator underscores the possibility for sustained growth in buying pressure, which supports the primary expectations.
Post-lockdown considerations
The massive jump in consumer prices last month is mostly owing to rising energy prices. Demand for commodities is quite robust at present, and it's likely to remain so in the long term.
UK MoM Inflation Rate. Image source: TradingEconomics.com
The British government should watch this trend very carefully now that it is on track to ease drastically the lockdown restrictions. This would inexorably cause an uptick in demand, which would drive inflation even higher. The British economy is thus running the risk of overheating in the second quarter.
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