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The British Pound has tumbled to a new low for the year after UK CPI inflation data missed market expectations. The general market consensus was for inflation to inch higher to 2.6% versus the 2.4% y/y previous reading. However, the annualised UK inflation rate is stuck at 2.4% for the third consecutive month. The month over month reading inched lower to 0% versus the 0.4% previous reading and lower than the 0.2% expected reading.
Even though UK inflation remains above the Bank of England’s target of 2%, the disappointment in the latest reading suggests that the inflationary pressures are easing off. This data on top of sluggish wages could easily give MPC members sitting on the fence enough evidence to hold interest rates unchanged in August. That said, we still think chief economist Andy Haldane holds his nerve and votes for a hike again. It seems every time the Bank of England peer through an open window of opportunity to lift UK rates, economic and political headwinds blow it shut again.
On top of interest rate speculation, the greater risk for the GBP/USD exchange rate remains Brexit. It is hard to conceive a scenario where the UK faces a no deal Brexit, with or without high inflation, where the Bank of England would raise interest rates. Lower rates for longer dampens the logic of holding pound-Sterling, especially against the dollar.
In the short-term, the political risk and the uncertainty over Brexit have started to heat up. UK Prime Minister May has won parliamentary votes but has hardly secured the full support of her cabinet on her approach towards a customs union between the UK and EU. After the unexpected resignations of high-profile ministers over Brexit, uncertainties exist that did not a month ago. Until we have a trade deal between the UK and the EU we should expect a more volatile GBP/USD exchange rate.
The GBP/USD technical pattern may look extremely bearish, however, as long as the bulls manage to defend the big psychological number 1.3000. Until a further catalyst is provided, there is a chance for the cable to stabilise near the big round number and support level 1.3000.
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