British Pound: Softer Inflation Continues to Weigh on the Pound

The British pound began to weaken at the onset of the European trading session and continued to sell-off throughout the trading day. Even though UK unemployment fell to the lowest level since 2005, average earnings growth slowed from 4.6 percent to 4.5 percent.

Inflation is clearly falling with earnings being the third piece of inflation data that has surprised to the downside. Since inflation was the primary reason for the central bank?s rate hike last month, the fall in inflation seriously questions whether they will raise rates again next month. The fact that the Bank of England Quarterly inflation report failed to contain any urgency for a rate hike also added to the overall bearishness. The BoE signaled that if inflation moves back to 2 percent, they may need to raise interest again by 25bp. The recent move in the GBP/USD reflects a currency that is working off excess speculation. It is clear that the central bank is watching inflation, so pound traders need to do the same if they want to figure out where the currency is headed next.