Sterling Drops on Soft CPI

Sterling as well as UK yields have tumbled following the UK December inflation data release, which saw headline CPI come in much weaker than expected. The fall in cable saw the currency pair match Friday’s 1.5077 low before finding a support, after dropping from 1.5120 on the data. Core CPI, which strips out volatile items, including fuel and food, moved slightly higher. The data will still, however, support the dovish majority at the BoE’s Monetary Policy Committee, and markets will continue push back expected start data for policy tightening.

U.K. December CPI much weaker than expected at 0.5% year over year, the lowest rate on record and down from 1.0% in November and the median forecast for 0.7%. The drop in price pressures was driven by falling oil prices, which saw the price of crude paid for in the UK drop 13.2% year over year. Food prices also dropped notably, by 1.9% year over year, the biggest fall since June 2002.

The BoE in its November Inflation Report anticipated sub-1% levels will be seen over a six month before gradually rebounding toward 2% over the three-year forecast horizon. PPI data saw input prices fall 10.7% year over year after falling by 8.2% in November. Output prices fell by 0.8% year over year, a new cycle low, while November data were revised to -0.6% year over year from -0.1% year over year.

Sterling found support near the recent lows at 1.5070, as momentum continues to point to a lower exchange rate. The next level of target resistance is seen near the 2013 lows at 1.4810. Resistance is seen near the 10-week moving average at 1.5495. The RSI (relative strength index is oversold on a daily weekly basis) which are printing in oversold territory with the weekly print at 19, well below the 30 oversold trigger level.

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