UK CPI, GBP/USD Analysis

• UK CPI drops in March but less than expected
• Pound sterling reaction: Intraday gains eye 1.2500 level but GBP/USD selloff has been unrelenting
• Get your hands on the Pound sterling Q2 outlook today for exclusive insights into key market catalysts that should be on every trader’s radar:

UK CPI Drops in March but Less Than Expected

UK headline CPI (year-on-year) eased to 3.2 from 3.4% last month, while core CPI dropped from 4.5% to 4.2%. The core measure strips out the volatile price effects relating to fuel and food to provide a better measure of the general prices of goods in the UK.

The month-on-month print remained higher than the BoE would like, at 0.6% – matching the February pace of price increases. The monthly comparison saw declines in food prices while the recent rise in fuel prices added to the elevated measure.

Customize and filter live economic data via our DailyFX economic calendar

The Bank of England is likely to communicate the need to see data moving closer to target before acquiring the necessary level of confidence to start cutting interest rates, with markets pricing in a possible cut in August and fully price in a cut by the end of September.

Sterling held up rather well against the US dollar in Q1 apart from a late slide in March as relatively high inflation in the UK meant the BoE was likely to keep rates above 5% for longer than its peers. Yesterday’s mixed data will also factor into the BoE’s decision-making process as average wages failed to show much progress. Average earnings including bonuses in Feb remained at 5.6% while the measure excluding bonuses eased slightly from 6.1% to 6%.

Pound Sterling Immediate Reaction (GBP/USD)

Cable (GBP/USD) headed higher in the wake of the release, as CPI surprised expectations on the upside. A more recent slowdown in the broader GBP/USD decline has helped in some way to provide momentary support. The daily close will help to provide a better indication of whether the selloff has been averted for now.

GBP/USD 5-Minute Chart

Source: TradingView, prepared by Richard Snow

Currency trading requires an in-depth knowledge of the factors that determine price. Find out what makes the British pound tick:

USD tailwinds include the safe haven bid from the uncertainty in the Middle East and Fed-ECB policy divergence, which is likely to keep the greenback elevated. GBP/USD eyes 1.2500 as near-term resistance if the current lift is to continue. A break and hold above this level is needed before considering a deeper pullback into what has been a sharp decline up until this point.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX