GBP/USD bulls flirt with 1.3800 around monthly high, focus on UK inflation

• GBP/USD grinds higher around five-week top after cheering broad US dollar weakness.
• BOE rate hike concerns joined risk-on mood to favor bulls.
• UK coronavirus fears, Brexit jitters challenge upside ahead of British CPI for September.
• US stimulus, Fed tapering concerns may also entertain traders.

GBP/USD seesaws around 1.3800 as traders brace for the key inflation data during Wednesday’s Asian session. The cable pair cheered hopes of the Bank of England’s (BOE) rate hike, as well as broad US dollar weakness, to refresh the multi-day high the previous day. However, challenges surrounding the UK’s covid conditions and Brexit woes probed the bulls.

Bloomberg quotes BOE Governor Andrew Bailey’s latest comments to highlight the rate hike chatters. “Speaking to an online panel organized by the Group of 30, Bailey said that while central banks don’t have the tools to counter supply disruptions and he still believes the recent acceleration of inflation will be temporary, officials need to seek to prevent higher inflation expectations from becoming entrenched,” said the news.

On a different page, the US dollar eased after the downbeat housing data cooled down tapering tantrums. US Housing Starts registered a sharp fall in September, -1.6% MoM versus +1.2% prior, whereas the Building Permits registered the largest contraction since February, down 7.7% compared to 5.6% previous readouts. That being said, the US Dollar Index (DXY) dropped to a three-week low before consolidating losses around 93.77 at the latest.

It’s worth noting that the risk-on mood helped the Wall Street benchmarks to poke record tops whereas the US 10-year Treasury yields gained 5.7 basis points (bps) to rise to the highest levels since late May by the end of Tuesday’s North American session.

Alternatively, the UK recorded the highest coronavirus-led daily death numbers since March 9 the previous day. “The weekly rate of new reported cases of Covid-19 in the UK is one of the highest in the world, having jumped from 367 cases per 100,000 people at the start of October to its current level of 463 per 100,000,” said the HuffPost UK.

Also negative for the GBP/USD prices were Brexit headlines quoting UK Minister David Frost who pushes the bloc for easing controls over the Northern Ireland (NI) border. However, UK PM Boris Johnson sounds optimistic noting job losses and disruption to capital flows have been lower than feared, per Bloomberg.

Given the latest supply crunch and fresh reflation chatters, any uptick in the UK CPI, expected to remain unchanged at 3.2% YoY in September, may well anchor the expectations of a BOE rate hike in 2021, which in turn could propel the GBP/USD further towards the north.

Read: UK September CPI Inflation Preview: Will rising price pressures boost British pound?

Technical analysis

In addition to the 100 and 200-DMA, respectively around 1.3810 and 1.3850, a downward sloping resistance line from July 30, close to 1.3860, also challenges GBP/USD upside. However, sellers may refrain from fresh entries until the quote stays beyond the 50-DMA level surrounding 1.3710.