- Percentage of commands to buy the Sterling went up from 62% to 73%, indicating growing demand
- SWFX market participants remain equally divided between the bulls and bears
- 18% of traders still see the pair between 1.54 and 1.56 in three months
- Upcoming events: US FOMC Minutes, US PPI, US Buildings Permits, US Housing Starts, US Industrial Production
The Pound performed worse than most of its counterparts on Tuesday, as some of the releases surprised to the downside. The currency lost 0.67% against the Loonie, 0.65% against the Aussie, and 0.57% versus both the Euro and Kiwi.
Britain's inflation continued to fall, declining to record low since records began in 1989, driven down by a plunge in food and fuel prices. The annual rate of inflation came in at 0.3% in January, according to the Office for National Statistics. The reading marked a move down from December's 14-year low of 0.5%. In the year to January, food prices declined 2.8% and prices of motor fuels plummeted 16.2%. Petrol in January was at the lowest price since November 2009, while diesel since February 2010. On a monthly basis, consumer prices dropped 0.9%, the largest monthly decline since January 2001. The core CPI, which strips out volatile components such as food, energy, alcohol and tobacco, increased in line with market's expectations to 1.4%. The last time Britain experienced a fall of prices on average over a full year was during the Great Depression. The inflation data is likely to push back further expectations of a rise in interest rates in the UK.
According to the BoE's February forecast, CPI inflation is likely to slide temporarily below zero in spring and remain around this level for the rest of the year. It then is expected to rebound around the turn of the year, as the effects of cheap energy prices drop out of the annual rate comparison. The BoE's estimates show inflation averaging 0.12% this quarter and 0.03% in the three months through June. With wage growth picking up, that is helping to boost workers' real incomes.
Bank of England's Governor, Mark Carney, promised that the UK would hit the central bank's 2% target within the next two years, which is sooner than previously forecast. He also mentioned that the current period of falling prices was temporary and fundamentally distinct phenomenon from deflation.
Fundamental background
All of UK data will have been released by the time of this report, however, there is still a lot of the US data (US FOMC Minutes, US PPI, US Buildings Permits, US Housing Starts, US Industrial Production) anticipated later today.
GBP/USD extends decline
Mark Carney, Bank of England Governor, pre-warned consumers that a negative inflation rate will be temporary and the UK will not experience deflation. "Enjoy it while it lasts" – Mark Carney said last week.
As for the Sterling itself, despite the bullish technical indicators, GBP/USD cross keeps moving downwards, while trading just above the 55-day SMA. However, the pair is edging closer to the weekly PP level each day, where the Sterling is likely to find support around 1.5333, as studies suggest the Pound will appreciate.
Daily chart
Looking closer at the GBP/USD pair on an hourly chart, the cross is steadily declining towards a two-day low of 1.5343. However, the closest support, which is the weekly PP, is also backed by the lower border of the Bollinger band, strengthening the initial support level. The Sterling is likely to regain momentum in a couple of hours or at the end of the day, unless the US releases are better than expected.
Hourly chart
Perfectly neutral sentiment
SWFX market participants remain equally divided between the bulls and bears. Meanwhile, there is a growing percentage of commands to buy the Sterling. Over the night their share went up from 62% to 73%, indicating growing demand.
The sentiment among the SAXO Bank clients is more bullish than neutral, being that 55% of open positions are long. OANDA traders have a bullish outlook with respect to the Cable as well, as 63% of market participants are to profit from Sterling's appreciation.
Spreads (avg, pip) / Trading volume / Volatility
18% of traders still see 1.54/1.56 in three months
This week traders' expectations changed dramatically, with 70% of Dukascopy Community members predicting the pair to advance. Alongside, the average forecast for the end of the week is placed around the 1.537 level.
A proponent of a bullish scenario, al_dcdemo, reckons that "the pair is likely to correct further towards 1.55 level", adding that reasons for this are "hawkish inflation report and encouraging data late from UK". Meanwhile, Daytrader21 holds a bearish view on the pair, expecting the Dollar to outperform the Pound because of the latest BoE's inflation report, after which inflation should become negative, pressuring the GBP/USD pair to the downside.