Continuous signs of cooling inflationary pressures in the United Kingdom could force the Bank of England to repeatedly delay monetary policy normalization this year.
UK inflation has unexpectedly fallen to a 13-month low at 2.4% in April from 2.5% in March, thanks to cheaper airfares. Although the drop in inflation last month is good news for consumers since it bolsters the value of real wages, this could be terrible news for the Pound. With the currency well known for its sensitivity to monetary policy speculation, further losses may be witnessed as investors scale back bets of a BoE rate hike in August.
Focusing on the foreign exchange outlook, the British Pound/U.S. dollar (GBP/USD) currency pair tumbled to a five-month low following the release of the inflation figures, with prices trading marginally below 1.3340 as of writing. The monetary policy divergence between the Federal Reserve and the Bank of England has made the GBP/USD fundamentally bearish. Sustained weakness below the 1.3400 level could encourage a decline towards 1.3320 and 1.3250, respectively.
FOMC meeting minutes in focus
The Dollar was king against a basket of major currencies on Wednesday ahead of the release of May’s FOMC meeting minutes, which are likely to be closely scrutinized for clues on rate hike timings this year.
With U.S. inflation rising towards the Fed’s target and positive economic data boosting sentiment towards the US economy, expectations remain elevated over a rate hike in June. If the Fed meeting minutes are hawkish and reinforce speculation of a June rate hike, the dollar is likely to receive another solid boost.
Taking a look at the technical picture, the Dollar Index remains firmly bullish on the daily charts. The combination of rising US Treasury bond yields and heightened rate hike expectations have made Dollar strength a dominant market theme. A decisive breakout above 94.00 could open the doors to 94.20 and 94.50, respectively.
Commodity spotlight: WTI Oil
Oil prices seem to have edged lower on expectations that OPEC may ease supply curbs in June.
However, losses are likely to remain limited thanks to geopolitical risk factors. With the looming sanctions against Iran and falling output from Venezuela fuelling speculation of tighter global supply, Oil could remain supported in the near term. While Oil prices have scope to edge higher as bulls exploit geopolitics to fuel the rally, surging US Shale production remains a threat to higher Oil prices. With Shale production forecasted to hit a record high in June, bulls may face some headwinds down the road.