The Sterling falls back towards 1.3200 as the U.S Dollar strengthens due to a better than expected PPI release from the U.S. This rise in the PPI signals an increase in input prices for producers and manufacturers and the increase in prices may be transferred to the consumer and thus increase inflation in the general economy. The hypothesis that the increase in prices may be transferred to the consumer will be confirmed today with the release of the U.S CPI. The positive PPI figure comes after Tuesday's positive JOLTS Job Openings report and the combination of this week's economic data led to an increase in the probability of a fourth rate hike by the U.S Federal Reserve. So far this week, the probability increased from 44% to 55% and a better than expected CPI report from the U.S will contribute towards a larger increase in the probability.
Earlier this week, the Sterling dropped over 150 pips following the resignation of two key governmental personnel, British foreign secretary, Borish Johnson and Brexit Minister, David Davis. Their resignation was due to their disagreement with Prime Minister, Theresa May over the conditions surrounding Brexit and the negotiations with the European Union.
Before yesterday's drop, the Pound retraced back up 70 pips as some market participants believe that the resignations will allow for easier negotiations with Europe and a softer Brexit. Investors should watch for a break below the 1.3188 point as it will expose the 1.3130 level.
Following the 150 pip drop, the pair retraced back up towards the 0.5 Fibonacci retracement which coincides with a key resistance level. When this level was reached, bears kicked in and started pushing the pair lower towards the 1.3200 level. The Pound is on the verge of forming a bullish double bottom pattern within a key support level (1.3200) but fundamentals point towards a failure of a reversal and a break below 1.3187. A break below 1.3187 will then expose the 1.3130 level which happens to be at both a key structural support level and the 1.44 Fibonacci extension.