Lack of Inflation Sends Sterling Below Support

by on December 17, 2013 3:51 pm GMT

Last month, the United Kingdom’s consumer price index fall was steep, falling from 2.7 percent to 2.2 percent; and the decline in inflation continues in November as data shows annual consumer prices fall a tenth of a percent to 2.1 percent, according to the Office for National Statistics. “The pound weakened a little after inflation came in weaker than expected,” said Peter Kinsella, FX strategist at Commerzbank AG.

The Sterling fell for the fifth consecutive day after reaching a new yearly high of 1.6464. Pual Robson, FX strategist for the Royal Bank of Scotland Group, said “Slightly softer-than-expected CPI inflation plays negative for sterling.” However, the UK inflation has fallen over a half-percent in two months, and this may go against the prospects of future growth in the United Kingdom.

The Bank of England (BoE) Governor Mar Carney said that accommodation monetary policy will continue until unemployment reaches that seven percent target. He reiterated in a conference last week that higher rates are still determined on the economic growth going forward and inflation stays above that central bank gold standard of two percent. A 2.1 percent, there is a threat of inflation falling below. Carney will speak with lawmakers in the House of Lords Economic Affairs Committee today.

The GBPUSD pushed through key support at 1.6285 before pulling back. Price action remains below the 20 EMA, and a close below these levels could send the Sterling down to 1.6140 per dollar. Increased volatility is expected prior to the Federal Open Monetary Committee (FOMC) meeting tomorrow on whether there will be that much awaiting taper in the Federal Reserve’s massive quantitative easing program.