Inflation Declines Pushing the Sterling Higher

by on January 14, 2014 8:30 pm BST

The Sterling pushes higher as inflation declines to the Bank of England’s yearly inflation target of two percent for the first time in more than four years, fueling speculation that the economy in the United Kingdom will continue to strengthen. The Sterling broke a four day decline against the euro and popped up after yesterday’s large decline against the greenback.

The lower inflation will allow Bank of England (BoE) Governor Mark Carney to leave interest rates lower for longer, which is not really what those hoping for higher rates are looking for. “Abating price pressures would continue to support the real purchasing power of U.K. consumers and prop up growth,” said Valentin Marinov, head of G10 FX strategy at Citigroup’s London branch.

The pound has gained over seven percent during the last six months, and the GBPUSD has maintained a 300 pip, roughly, trading range over the last three week. The 4H chart shows that the Sterling has seen a good deal of resistance at 1.650/10, with the most recent decline starting from that level to breaking through the 200 EMA at 1.6345.

The 200 EMA provided support, and the pair has been able to move upward. However, the 38.2 Fibonacci retracement back to the highs is creating resistance at 1.6450/65. A close above this level could pave the way back to 1.6500, while support will be found at 1.6400.

4H Chart of GBPUSD

4H Chart of GBPUSD

The daily chart shows the recent trading range nearing the highs of 1.660. Momentum is fading at 1.6445/50, and the ADX is supporting weak price action as is slopes downward to 17. The +/-DMI are both pointing down with slight convergence.