British Sterling erases CPI driven losses

The main risk for the day was the UK’s inflation data which dipped below consensus. Headline inflation, year on year dipped to 0.5% December, a considerable decline off from the BoE’s 2% inflation target. Core CPI y/y however was stable at 1.3% as expected and slightly higher from 1.2% in November.

On a monthly basis, CPI remained flat at 0%, below consensus estimates of 0.1%, after the decline to -0.3% in November.

The dip in the annual headline CPI to 0.5% will see the BoE Governor Mark Carney pen an open letter to the UK Treasury explaining the reasons for the large deviation from the Central Bank’s target inflation rate of 2%. However, obvious by the main reason which is falling crude oil prices, the current scenario should help the BoE stick to its monetary policy without any changes.

Market speculation is however putting off a BoE interest rate hike towards 2016 against earlier expectations of a possible hike in spring 2015.

The British Sterling saw a sharp sell off during the day as the news was released dipping towards an intraday low to 1.50783 but managed to rebound from the lows. The pair, despite the longer term bearish trend remains stronger in the short term, as long as the pair remains sustained above today’s low and the major low made yesterday near 1.5035 levels.

Incidentally, today’s low also marks the same levels from which the GBPUSD staged a massive rally since July 2013. In the longer term the entire region from 1.51 through 1.49 remains a major long term support level. Therefore, for any downside moves, we could expect the declines to gradually slow down and probably struggle to break lower.

A break above today’s high near 1.519 could possibly see the Cable aim for higher gains, potentially targeting the broken support level near 1.5486 level, with the next main fundamental risk coming from the US retail sales for December, which could likely surprise to the upside along with the monthly and yearly CPI numbers from the US, which consensus points to a dip.

While inflation has been playing spoilsport to many Central banker’s interest rate hikes while also accelerating deflation in the Eurozone, the fact that the US economy has remained resilient against the backdrop of falling Crude oil prices is remarkable. In this context, the US CPI data will be critical this week considering that even from a technical perspective, the Dollar index has been trading close to a major multi-year resistance level, which could possible tip the scales for a correction in the Greenback should fundamental data support the view.