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GBP/USD: Cable under pressure as BOE inflation expectations continue to weigh

H.S. Borji
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The British pound declined further against its US counterpart Thursday, as traders continued to evaluate the Bank of England’s gloomy inflation forecast amid a dearth of economic data.

The GBPUSD fell to fresh yearly lows Thursday, declining 0.2 percent to 1.5732. The pair is likely supported at 1.5726. On the upside, initial resistance is found at 1.5893.

Cable plunged Wednesday after the Bank of England lowered its outlook on inflation.

“Inflation has fallen further below the [Monetary Policy Committee’s] 2% target, reflecting the impact of lower food, energy and import prices and some continued drag from domestic slack,” the quarterly Inflation Report said.

“Inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1% at some point over the next six months,” the Report added.

UK annual inflation fell to a five-year low of 1.2 percent in September. Combined with weak earnings growth, declining consumer prices may give the BOE the justification it needs to maintain rock bottom interest rates.

The Bank added that the UK economy was still improving, despite a weaker global outlook. The BOE said it expects the UK economy to grow 3.5 percent this year. It downgraded its 2015 outlook to 2.9 percent from 3.1 percent.

Economic growth slowed to 0.7 percent in the third quarter, the Office for National Statistics reported last month. The economy had grown 0.9 percent in the three months through June.

The pound has been in free fall since July, around the time the US dollar began to assert its dominance. Cable has plummeted 8.1 percent since July 1. The US dollar index, a weighted average of the greenback against a basket of competitor currencies that includes the pound, has gained nearly 10 percent over the same period.

The dollar index was at 87.68 Thursday, down 0.16 percent.

The British pound also declined against the euro, as the EURGBP advanced 0.62 percent to 0.7925. Against the yen, the pound tumbled 0.2 percent, sending the GBPJPY to 182.10.

The pound remained under pressure despite another solid month of jobs data. The UK claimant count rate declined 20,400 in October following an 18,400 drop a month earlier, the ONS reported Wednesday. The unemployment rate held steady at 6 percent in the three months through September.

Average earnings excluding bonuses increased at an annual rate of 1.3 percent in the three months through September, overtaking inflation. Average wages had increased just 0.9 percent annually in the three months through August.
Including bonuses, earnings rose 1 percent, the ONS said.

Weak earnings growth has been an issue for Bank officials, who are concerned the recovery may not be tricking down to household budgets. The earnings dilemma has divided the MPC about how to proceed with monetary policy, resulting in three consecutive 7-2 split votes about raising interest rates. MPC members Martin Weale and Ian McCafferty have been voting in favour of raising the benchmark lending rate by 25 basis points.

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