Sterling Trades Under Pressure Following Soft CPI; MACD Generates Sell Signal

Sterling has been under performing, and remains below support levels, giving back about two thirds of the gains seen yesterday against the greenback. An unexpected dip in March core CPI to a cycle low of 1.0% year over year from 1.2% invited fresh selling, though the pound had been under some pressure ahead of the data release. The headline March CPI figure came in at 0.0%, matching the record low seen in February, as expected.

The data should keep the BoE tightening debate on a back burner into the May-7 general election. There are numerous possibilities in terms of policy implications, and there is an added risk that the fiscal policy in a minority government scenario will lack clarity. Best case scenario would be a grand coalition between the Labor and Conservative parties, though this looks unlikely.

UK March headline CPI unchanged at 0.0%, as expected by our survey’s median forecast. Core CPI, however, unexpectedly ebbed to a new cycle low of 1.0% year over year, down from 1.2% in February. PPI figures showed input prices rising slightly to -13.0% from -13.5% and output prices also firming modestly, to -1.7% year over year from -1.8% year over year. Sterling and Gilt yields have traded moderately lower on the unexpected dip in core CPI, which reaffirms the view that the BoE has time on its hands with regarding to making an eventual decision on raising the repo rate. This Friday’s monthly labor market report is the next focal point, where we expect new cycle lows in both the claimant count and unemployment headline. Wage data will be a particular focus as developments here are being watched closely by the BoE.

Gilt prices are higher on the trading session while the GBP/USD is trading below support levels. After breaking through the 1.4650 level on Friday, prices have been trading on the defensive. Additional resistance is seen at the 10-day moving at 1.4778. Momentum on the currency pair has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average crosses below the 9-day moving average of the spread.

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