The British pound declined sharply against its US counterpart Tuesday, as weak inflation suggested the Bank of England would continue to hold off on raising interest rates.
The GBPUSD plunged more than 100 pips to 1.4866. It had bottomed out at 1.4856 in intraday trade. The pair faces initial support at 1.4863 and resistance at 1.5016.
The outlook on the pound is less favourable than other US dollar crosses, as weak inflation expectations continue to dent rate-hike expectations. UK consumer prices rebounded in February, rising 0.3 percent after tumbling 0.9 percent the previous month. However, annual CPI was flat following a 0.3 percent gain in January.
So-called core inflation, which strips away volatile goods such as food and energy, climbed at an annual rate of 1.2 percent in February, down from 1.4 percent.
The Bank of England expects inflation to turn negative by the spring before gradually returning to target levels over the next two years. Tumbling prices are a welcome sign for cash-strapped consumers struggling with weak income growth.
The BOE’s Monetary Policy Committee has voted to keep interest rates at record lows for the past three meetings after Ian McCafferty and Martin Weale dissented for five straight meetings.
Free Reports:
February consumer price growth was also weak in the United States, although underlying inflation showed signs of recovery, as gas prices rose for the first time in three months. US CPI increased 0.2 percent in February after declining 0.7 percent in January, the Labor Department reported on Tuesday. Annual CPI was unchanged after slipping 0.1 percent in January.
The Federal Reserve is unlikely to begin normalizing monetary policy before September. The Fed is concerned about weak inflation, but views the recent decline as transitory. Inflation levels are forecast to return to normal levels by 2016, according to the Fed’s latest summary of economic projections.
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