After hitting a fresh five-year low at 1.4565 only at the beginning of the week, the GBP/USD appeared dangerously close to re-entering 1.45 after declining to 1.4602 following further weak UK inflation data pressuring the Sterling. Although annualised inflation remained unchanged at zero, what is going to concern the Bank of England (BoE) is core inflation remaining below expectations.
Core inflation remaining unexpectedly weak suggests that the UK inflation risks extend further than the recent decline in the price of oil, and could now lead to an extension of comments from BoE policymakers regarding the possibility of the BoE easing monetary policy in the future. A monetary easing move from the BoE would come as a huge surprise and the chances of this occurring do appear limited, however the UK inflation risks are stronger than first anticipated and I would expect the BoE to at least attempt to talk down the GBP over the issue.
In essence, what the inflation data has done is further extend the complete lack of investor attraction towards the GBP/USD that has already negatively impacted investor sentiment during the first quarter of the year. The lack of investor attraction towards the GBP/USD has not just been limited to unexpected UK inflation risks, because this has in turn erased all optimism that the BoE would raise interest rates during 2015. The repeatedly pushed-back interest rate expectations have already contributed to the GBP/USD declining from 1.71 last summer to as low as 1.45 at the beginning of the present week.
To be honest, I still do not think the GBP/USD has found a bottom yet and I am not ruling out the possibility of further lows over the next month. The upcoming UK election is now just a month away, and you just have to look at the latest opinion polls showing that the Conservative party has regained the lead to gain an understanding that the election is going to be extremely close. As we get closer to the election date, there are further possibilities for increased volatility in the financial markets and it is more likely than not that the GBP/USD will face further downside risks.
Until the UK election is over at the very least, all upside gains for the GBP/USD are limited to USD weakness. As we have also repeatedly encountered over the previous couple of months, all USD weakness is temporary for as long as optimism remains that the Federal Reserve will raise US interest rates during 2015.
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