UK inflation at its lowest for 25 Years

US Dollar Research Report

UK inflation at its lowest for 25 Years

Hawkish report from the BOE propels Sterling

US policy shift will hinge on data

Sterling Dollar GBPUSD FX Technical Analysis

The focus this month for Sterling was with the Bank of England as it delivered their quarterly inflation report. The Governor has had to write the first open letter to a chancellor explaining why inflation was so low and explain what the Monetary policy committee was going to do about it. Inflation was reported at 0.3% in January which was way below market expectations mainly due to the recent falls in energy prices. This was the lowest reading for 25 years. The Governor has asked the market to look through the low reading as he and the other members of the committee believe that the low oil prices are due to supply issues rather than any lack of demand and that lower oil prices are a net positive for global economy. They also upgraded growth forecast for the UK and stated that any interest rate rises would be limited and gradual. In my opinion they left all of their options open however the market thought the report was overtly hawkish and Sterling has risen subsequently.

Next week the BOE meet although no change to policy is expected. We will look towards the Purchasing managers indices for any clues as to the underlying strength of the UK economy in the short term.

The dollar has been buoyant of late as markets prepare themselves for a rise in US interest rates. The Fed have kept the word "patient" within their statement for the last couple of meetings which would indicate that any rate rise will not happen before the end of the summer. The market has become confused by conflicting messages emanating from fed officials. Yellen has made it clear that any change in policy will be data dependant therefore next week's Non-Farm payrolls release becomes even more important. Another positive release will see the dollar bulls return with a vengeance.

For USD Buyers

While the break of the trend line at 1.5200 was disappointing the current move is still only corrective in nature. Only a break above chart and Fibonacci resistance of 1.5600 would confirm a change in sentiment. I would suggest targeting 1.5500 in the short term.

For USD Sellers

You may have missed the absolute bottom on this move but there may be some light at the end of the tunnel. Leave stop loss orders above 1.5600 hoping for a move back towards 1.5000.