Sterling is lower after the unexpected dip in inflation into negative territory, the first in more than 50 years. The weak inflation environment means the BoE can take its time when considering monetary tightening, although given that the BoE always expected inflation to dip into negative territory, it may be too early to write off forecasts of a higher pound.
U.K. inflation unexpectedly dipped to -0.1% year over year, against expectations for an unchanged annual rate of 0.0% year over year. This was the first negative annual rate for more than 50 years. Lower energy and food prices remain the main driving factor, although core inflation, which strips out the most volatile items, dropped to 0.8% year over year the lowest since 2001. The BoE was anticipating negative CPI levels in the coming months but expects the headline rate to turn higher later in the year. Still, with headline rates at these low levels, there is no need to consider rate hikes any time soon.
Last week was a notable one for UK markets as there was the big relief of the unexpected Conservatives majority win at the general election, and then there was better-then-expected production, wage and unemployment data. At 5.5% in March, the jobless rate now matches the BoE’s NAIRU estimate the point at which the central bank estimates would start to trigger inflationary pressures via higher wage demands. But the BoE trimmed both growth and inflation forecasts in its Quarterly Inflation Report, and Governor Carney has been careful to dampen tightening expectations.
Following the inflation data the GBP/USD sliced through the 10-day moving average at 1.5570 and is poised to test support at an upward sloping trend line near 1.5540. Momentum is turning negative as the trajectory of the MACD is moving lower. Resistance on the currency pair is the recent highs at 1.58.
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