Forex Spread Betting: GBP/USD Pair Declines with Falling Inflation

Posted on | May 22, 2012 | No Comments

UK April inflation hit a 2-year low of 3.0 percent (lowest since February 2010) from 3.5 percent in March, while the annual core CPI (excluding energy, food & alcohol), slowed to 2.1 percent from 2.5 percent, reaching its lowest since November 2009.

The UK inflation picture looks increasingly similar to the cycle in 2008-09, when CPI peaked at 5.2 percent in September 2008 before plunging to a 4-year low of 1.1 percent. A fresh 5.2 percent peak was reached in September 2011 before slowing back to 3.0 percent.

Equally significant, is the rapid breakdown in core CPI, which fell 140 bps in the last six months (from 3.5 percent to 2.1 percent), reflecting the widening contrast between energy and alcohol items relative to headline inflation.

If the current trend remains (and continues to reflect that of 2008-09), then 1.5 percent on the core could be reached before year-end, prompting the headline CPI to reach the BoE’s 2.0 percent target as early as Q4 of this year.

Forex spread betting markets await more UK indicators this week, with Wednesday’s release of the May CBI survey on industrial orders expected to dip to -11 from -8, and Thursday’s release of UK April retail sales (ex-auto fuel) seen slowing to 1.2 percent from 3.3 percent.

If the revised Q2 GDP confirms the previous reading of -0.2 percent, then Sterling and gilt yields could be in for prolonged losses.

GBP/USD extends losses after last week’s break of its 4-month trendline support at $1.5950.

Momentum is deteriorating as cable fails to regain its 200-week MA of 1.58 remains below the 200-week MA and 100-week MA at $1.5860 and dips back to $1.5760s.

GBP/USD’s monthly chart suggests further downside towards $1.5450s as long as the $1.60 resistance holds successfully.

EUR/USD remains on track to re-test this year’s $1.2626 low, as long as the inability to recover above $1.28450-considered as a short-term resistance.

Ever since the EUR/USD began its 3rd downcycle (from last year’s peak of $1.4940), the pair’s rebounds have been limited at 8 percent (in October).

As these rebounds subside, we expect selling momentum to intensify in late summer and into $1.20.

In order for EUR/USD to reproduce the 22 percent declines in the prior two cycles of 2008 and 2010, the pair would have to reach $1.16, which would be the lowest since 2003.

10-year gilt yields lost 4 bps to 1.85 percent, continuing to remain well below their trendline support extending from the March high.

As long as the failure to take out the 1.95 percent barrier remains, we expect gilt yields to test the 1.80 percent floor.

Please remember that Spread Betting and CFD Trading are leveraged products that carry a high level of risk to your capital and can result in losses that could quickly exceed your initial outlay. These products may not be suitable for everyone, so please make sure you fully understand the risks involved.

Spread Betting and CFD comments by Joshua Raymond, Chief Market Strategist, City Index.

The above should not be construed in any circumstances as a recommendation or offer to sell or recommendation or solicitation of any offer to buy any security or other financial instrument.

Neither City Index nor Spread-Betting.org warrant or represent that the material is accurate, complete, not misleading, or fit for the purpose which it is intended and it should not be relied upon as such.

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