GBP/USD drops back towards 1.3400 on Brexit woes, UK inflation eyed

• GBP/USD retreats from weekly top, bears attack intraday low of late.
• Ireland’s Coveney admits EU ready to compromise over NI protocol, Friday’s Frost- Šefčovič meeting will be the key.
• BOE rate hike hopes renew on strong UK jobs report, bulls await firmer CPI.

Having poked one-week high the previous day, GBP/USD bears return during Wednesday’s Asian session. That said, the cable pair remains pressured at around 1.3420 by the press time.

The latest UK employment data underpinned bullish bias towards the Bank of England’s (BOE) next moves.

That said, the UK's Office for National Statistics revealed that the ILO Unemployment Rate declined to 4.3% in September from 4.5% in August. This reading came in slightly better than the market expectation of 4.4%. Further details of the report showed that the Claimant Count Rate edged lower to 5.1% in October from 5.2% and the Average Earnings Including Bonus rose by 5.8% in September, surpassing analysts' estimate of 5.6%. Following the data, the target rate probabilities for the December 16 meeting of the BOE show 67.5% chances of a 20 pip rate hike.

Elsewhere, the UK Express said, “Ireland's foreign minister, Simon Coveney claimed the EU is ready to offer proposals on medicines to ally concerns in Northern Ireland.” The news was linked to UK’s Brexit Minister David Frost’s threat to trigger Article 16. However, The taoiseach (Irish prime minister) Mícheál Martin told the Dáil (Irish parliament) that he felt UK negotiators had indicated they want a resolution, per the BBC. “The Taoiseach said he believed political parties in NI want to remain part of the European Single Market,” adds the BBC. Hence, the complex headlines over Brexit keep fears of a hard Brexit on the table and challenge the GBP/USD buyers ahead of Friday’s meeting between UK’s Frost and European Commission Vice-President Maroš Šefčovič.

Alternatively, Fed rate hike expectations jumped following an eight-month high print of the US Retail Sales for October, 1.7% MoM versus 1.4% expected. Adding to the bullish bias were figures concerning the US Industrial Production and housing market data. It’s worth noting that Fed policymakers like St. Louis Fed President James Bullard joined ex-US Treasury Secretary and former New York Fed President, Lawrence Summers and Bill Dudley respectively, to back the need for the Fed’s action. However, San Francisco Federal Reserve Bank President Mary Daly recently said, “Rate hikes would not fix high inflation now, would curb demand and slow recovery.”

Against this backdrop, the US Treasury yields rose 2.3 basis points (bps) to refresh a three-week high whereas the US Dollar Index (DXY) jumped to the new 16-month top. Further, equities were also positive whereas the S&P 500 Futures remain firm by the press time.

Moving on, the UK’s Consumer Price Index (CPI) and Producer Price Index (PPI) data for October will be important to watch for immediate GBP/USD forecast. Given the upbeat expectations from the scheduled inflation data, the cable may witness another push towards the north but the Brexit headlines and the Fed rate hike calls may hinder the run-up.

Read: UK CPI Preview: Buy the rumor, sell the fact? Three scenarios for GBP/USD

Technical analysis

Failures to provide a daily close past the monthly resistance line, around 1.3445 by the press time, direct GBP/USD prices towards the yearly bottom surrounding 1.3350.