Deflation fears drive pound lower

The pound has slipped against the dollar after inflation in the UK tumbles to its lowest level. 

Pound coin and dollar note
Source: Bloomberg

Euro eyes $1.10

EUR/USD is pushing higher as the squeeze on the single currency persists. The euro has been in an upward trend versus the dollar since last week as the Federal Reserve’s dovish language triggered an exodus from the greenback. This morning’s trading session saw the release of the service and manufacturing PMI reports for the eurozone, which pushed higher in the month of March, adding to the short-term bull run that the currency pair has been experiencing. The euro’s performance in the past few trading sessions has been particularly impressive when you consider the wider selloff in the dollar.

The $1.09 level is providing support and if it is held then the resistance at $1.10 will be the target. If that metric is cleared the acid test will be the 50-day moving average $1.1123 – EUR/USD has not traded above the 50-DMA in over three months. A drop below $1.09 will bring the $1.0840/50 region into play and below that traders will look to $1.08.

CPI report hits GBP/USD

The pound was put under pressure by the inflation report which dropped to zero in February – the lowest level on record. As I previously noted, Mark Carney has suggested he would cut interest rates from their all-time lows if necessary, and this will keep GBP/USD in its downward trend. Central bankers usually only act when they absolutely have to, and so it is unlikely we will see an interest rate cut from the Bank of England soon, but we will hear more talk of potentially loosening monetary policy. The UK’s largest trading partner is the eurozone, and it appears the deflation from the continental Europe is contagious.

The $1.49 mark is the initial downside target and if that metric is punctured then the 200-hour moving average of $1.4840 will be in sight. Beyond that dealers will look to $1.48. If $1.49 is held, the resistance in the $1.4970 region will be the target and a move through that metric will put $1.50 on the radar – a level which has not been tested since the last Fed meeting. 

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