The headline rate for inflation fell for England and so did the pound.
For the month of April, Consumer Price Index (CPI) declined 2.4%, a significantly lower reading than the forecast of 2.6% and the prior reading of 2.8%. With price pressure not hurting the economy, if the Bank of England decides it needs to ease some more, it very well could since inflation is falling.
Inflation has hurt the British economy during the global financial crisis and while expectations are low for a rate cut, the central bank may consider increasing the size of its asset purchase facility if we get another month of weaker statistics.
THE CHART
Price action on the weekly chart highlights the recent return of pound weakness and we should also mention dollar strength. As the markets debate whether the Fed will tap the breaks on QE, the U.S. currency has appreciated against most of the other high-beta currencies. If the dollar continues to gain momentum, the pound may see a return towards the lows from earlier this year around the 1.4850 region.
KEY LEVELS
The blue rectangle highlights the 1.5250 zone which represents a key pivot over the last four years of trading. A bearish stance may remain in place as long as we don’t see a daily close above this level.
By Wednesday, we will know more from the Fed and if we hear about concerns regarding the economy and no signs of tapering, the pound may easily return to 1.5500.
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