UK inflation drops for the first time in 6 months

Market Analysis /
16 Jan 2018

UK inflation data has shown the first easing in CPI for 6 months as the YoY rate dropped from last month’s 3.1% to 3%, with the monthly figure printing in line with expectations at 0.4%. The reading will be seen as good news as the UK as it continues to struggle with the fallout from Brexit negotiations. GBPUSD, which has been skyrocketing over recent days saw a brief dip lower to test new lows for the session before stabilizing back at the 1.3770 level.

With wages still stubbornly low and household debt continuing to rise, the news that inflation has dropped, albeit minimally, will be slightly better news that recent readings. Over the last 12 months, the UK has seen prices jump from 1.6% to highs of 3.1% seen last month. However, the brief drop lower in prices will not been seen as a long-term fix, as food prices slowed their rate of increase in the last month. Expectations are for food prices to continue to move higher as they have done throughout 2017, which in turn could continue to the rise in CPI after this brief hiatus.

However the expectations for CPI in the UK according to officials are for a continued move lower to 2.8% by the end of Q1 with a further move lower to 2.7% in Q2 then to 2.5% and 2.4% in Q3 and 4. Although dropping on the initial reading GBPUSD is looking particularly strong despite falling away from the recent highs.

We do have a level to look out for on the upside which is a 61.8% fib retracement. However just where we put the low for that fib is up for debate. We are taking the high from the EU referendum high and initially putting the low at the flash crash low of 1.1821, using this point gives us a 61.8% retracement level of 1.3792. A level that has been briefly broken but not confirmed by the closure of the weekly candle.

The flash crash can be taken by many as a fake level or fake price and it leaves me a little uneasy on the actual levels. However, if we also put a fib from the same high to the next low point, which is at 1.1983, it gives a slightly higher 61.8% fib retracement point at 1.3862, an area not yet breached. Using either low gives you a couple of levels that are hard to come by in a period where upside and US dollar weakness makes pinpointing resistance incredibly difficult.

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