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Lower Inflation Makes Way for a More Dovish BoE, Pound Declines

By Benjamin Spier
21 May 2013 09:16 GMT

THE TAKEAWAY: UK annual inflation falls to 2.4% in April -> Lower inflation may allow for a more dovish BoE -> Pound declines

UK annual inflation fell to a seven month low, thereby alleviating some of the pressure on the Bank of England to refrain from taking actions that would raise prices above target.

Consumer prices rose 2.4% from April 2012, lower than expectations for prices to rise 2.6% annually, and down from the 11-month high 2.8% inflation rate seen in March. Consumer prices only rose 0.2% over the month of April, according to the Office for National Statistics.

The annual producer price index for inputs declined to -0.1% in April. Retail prices rose 0.3% over the course of April. UK house prices rose 2.7% from March 2012.

The Bank of England said in April that it expects inflation to reach 3.1% by the third quarter of this year.

The inflation rate remaining above the BoE’s target 2% inflation rate may have prevented the BoE from raising quantitative easing in the previous months. Should inflation continue to fall in the coming months, chances of further monetary action may increase, which wouldexplain today’s drop in Pound following the lower than expected inflation release.

The Pound fell about thirty points and below 1.5200 against the US Dollar, following the release. GBP/USD may now see support by the key 1.5000 figure, resistance may be provided by a broken support line around 1.5200.

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GBPUSD Daily: May 21, 2013

Lower_Inflation_May_Allow_for_a_More_Dovish_BoE_Pound_Declines_body_gbpusd.png, Lower Inflation Makes Way for a More Dovish BoE, Pound Declines

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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21 May 2013 09:16 GMT