GBP/USD: Downbeat UK inflation expectations, housing data supersede Brexit news above 1.2300, Fed eyed

• GBP/USD struggles to defend the bounce off one-week low despite upbeat Brexit news.
• UK inflation expectations drop for the second month in a row, Mortgage Approvals slump to financial crisis era.
• Data driven weakness of US Dollar put a floor under the Cable price.
• Fed’s 0.25% rate hike is almost given but Chairman Powell’s play will be crucial to watch.

GBP/USD fails to cheer the US Dollar weakness much as Cable’s recovery from the weekly low fades around 1.2320 during early Wednesday. In doing so, the quote seems to justify the downbeat catalysts at home, mainly relating to inflation and housing markets.

That said, a monthly survey conducted by Citi and YouGov showed on Tuesday that the 12 months ahead UK public inflation expectations declined to 5.4% in January from 5.7% in the previous survey. This was the second straight decline in the UK public's inflation expectations. Following the data, Reuters reports, citing the survey that the declining trend in the UK public inflation expectations should further comfort to the Bank of England that high prices will not become permanently embedded in expectations.

Further, Reuters also quotes the Bank of England’s (BOE) housing market numbers to state that Mortgage approvals in Britain slumped in December to levels seen during the global financial crisis. The news also raised concerns over the housing market’s weakness which is faster than the consensus predicted. “The BoE said 35,612 mortgages were approved last month, compared with 46,186 in November,” the news said.

Alternatively, The Times reported the European Union (EU) and the UK’s breakthrough in the customs deal as a positive catalyst for Brexit and should have helped the GBP/USD but could not.

On the same line, the US Dollar Index (DXY) snapped a three-day rebound amid downbeat US data and firmer equities. Among them, the Employment Cost Index (ECI) for the fourth quarter (Q4) gained a major attention as it eased to 1.0% versus 1.1% market forecasts and 1.2% prior readings. Further, the Conference Board (CB) Consumer Confidence eased to 107.10 in January versus 108.3 prior. It should be noted that no major attention could be given to the US Chicago Purchasing Managers’ Index (PMI) for January which rose to 44.3 versus 41 expected and 44.9 previous readings.

In addition to the softer US data, upbeat Wall Street closing, due to firmer earnings from industry majors like General Motors, Exxon and McDonalds, also exert downside pressure on the US Treasury bond yields and should have weighed on the GBP/USD prices. The benchmark 10-year Treasury bond yields snapped a three-day uptrend by easing 3.51% on Tuesday.

Looking forward, US economic calendar has a slew of data to watch but major attention will be given to how the Federal Reserve (Fed) Chairman could push back market chatters over policy pivot. That said, the US central bank is widely expected to announce a 0.25% rate hike.

Also read: Federal Reserve Preview: The Good, the Bad and the Ugly, why the US Dollar would rise

Technical analysis

A first daily closing below the 10-DMA, around 1.2370 by the press time, in a monthly directs GBP/USD towards the 21-DMA support surrounding 1.2260.