UK’s office of national statistics (ONS) reported that CPI inflation in December grew 0.5% on the year. This is the lowest reading in almost 15 years. November’s print was 1.0%, and forecasts called for around a 0.7% reading. The headline for the official ONS report read “Rate of Inflation join lowest since records began”.
(click to enlarge; source: ONS)
The Bank of England will be required to write a letter to the Chancellor when inflation falls below 1.0%. Projections all point to further decline in inflation in 2015.
This disappointingly soft inflation reading and outlook should drag the GBP, but instead, we are seeing some resilience in the pound.
Resistance; Support, Reaction: The 1H GBP/USD chart shows that price was consolidating since last week, but this week, we saw price fail to break above 1.5192 three times. Ahead of the inflation data it dipped again. Then, after an initial bearish reaction after the inflation data, cable found support at 1.5096 for the third time since Friday’s reaction to US jobs data.
Bullish Correction/Consolidation Scenario: Now, if price can push above 1.5195-1.52, the GBP/USD should be in a short to medium-term bullish correction or consolidation. The fact that price is able to rally after soft inflation data would show that low inflation has been priced in and a correction is due.
Bearish Continuation Scenario: However, if price fails to return and close at least above 1.5150 today(1/13) and falls back below 1.5190, the pressure will be back towards the 1.5034 low, with risk of breaking towards 1.50.
EUR/GBP shows more evidence of pound-strength.
Resistance: EUR/GBP was consolidating a bit ahead of the inflation data. Its initial reaction to the soft data was a rally in favor of the euro. However, after failing to break above 0.7830 resistance pivot again, the pair retreated sharply, taken over by GBP-strength.
Bearish Continuation: It has broken below the 0.7784 support, and looks poised to at least test the low on the year so far, at 0.7745, with risk of continuing the prevailing downtrend.
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