GBP/USD Forecast: UK inflation Surprises On The Upside Pushing Sterling To 7-week High

• The headline UK CPI rose to 2.7 percent y/y beating the expectation of decelerating to 2.4 percent y/y in August.
• Core inflation also accelerated to 2.1 percent y/y in August.
• The upside surprise on the UK inflation pushed Sterling past 1.3200 level to fresh 7-week high.

Sterling is trading up 0.4 percent at above 1.3200 level on Wednesday after the UK inflation data surprised on the upside with the headline inflation accelerating to 2.7 percent y/y in August and core inflation rising 2.1 percent y/y beating the market estimate of 1.8 percent increase.

Within the structure of the UK inflation, rising prices for a range of recreational and cultural goods and services, transport services and clothing made the largest upward contributions to the month-on-month change in the UK inflation in August.

When measuring the UK inflation over the year, transport continues to make the largest upward contribution, with prices rising by 6.0 percent y/y in August, the highest 12-month rate since April 2017.

With the UK inflation beating the estimates, the monetary policy outlook is expected to remain unchanged after the Bank of England hiked the Bank rate to 0.75 percent at the beginning of August.

The news came out just one day ahead of the unofficial summit of EU leaders with the UK Prime Minister Theresa May in Salzburg. Although former UK Brexit secretary David Davis said earlier on Wednesday that not much should be expected from the Salzburg meeting, still some headlines are expected to come out.

Technically the GBP/USD is supported by the upward rising trend that coincides with a 55-period moving average on 1-hour chart. Rising UK inflation together with hopes for a positive headline from Salzburg Brexit meeting and the ongoing trade wars are helping Sterling to recover from the previous loses as the currency pair fell from the cyclical high of 1.4377 on April 17 to 1.2662 on August 15 this year. After the UK inflation date GBP/USD broke above 100-day moving average of 1.3185 and if the level above 1.3185 is sustained on the daily chart, next target for Sterling is 1.3300 representing 38.2 percent Fibonacci retracement.

GBP/USD 1-hour chart