GBP/USD roars back as UK consumer prices fall in March

The GBP/USD rose after the Office of National Statistics (ONS) released consumer price data for March. The data showed that

GBP/USD rises after CPI data

UK March CPI data

Consumer prices rose in March, according the ONS. The headline CPI rose by an annual rate of 1.5 per cent, which was slightly lower than the 1.7 per cent gain in February. Economists polled by Bloomberg expected the CPI to rise by 1.5 per cent. The CPI rose by 0.3 per cent on a monthly basis.

The closely-watched core CPI rose by an annualised rate of 1.6 per cent, which was slightly lower than the previous 1.7 per cent. Similarly, it dropped from the previous 0.6 per cent to 0.2 per cent on a monthly basis.

According to the ONS, the rise in prices in March was mostly because of an increase in housing, water, and electricity and was partially offset by a decline in motor fuels and clothing. Still, the overall inflation rate was below the Bank of England (BOE) target of 2%. In a statement, the ONS said:

The only broad group to make a downward contribution to the CPIH inflation rate in March 2020 was clothing and footwear. Prices in this category fell by 1.2% in the year to March 2020, resulting in the downward contribution of 0.06 percentage points.

Meanwhile, the Retail Price Index (RPI)rose by an annualised rate of 2.6%, which was slightly higher than the previous gain of 2.5%. It rose by 0.2% on a month-over-month basis. The RPI measures the change in the price of goods and services for the goal of consumption.

The ONS also released the Producer Price Index (PPI) input and output data. The PPI input, declined by 2.9% in March. Similarly, the PPI output was unchanged at -0.2% mostly because of a decline in oil and petroleum prices. The report said:

The annual rate for petroleum products fell 6.6% on the year to March 2020, down from negative 1.3% in February 2020. This is the lowest the annual rate has been since May 2016. This fall follows the drop in crude oil prices in February 2020, which is now feeding through to petroleum products in March 2020.

The chart below shows the recent trend in PPI input and output.

UK economy strained

The UK economy has been strained because of the coronavirus pandemic. The number of infections and death has continued to rise and experts are warning that the worse is yet to come. The country’s manufacturing and services sectors have been decimated and a number of iconic companies have gone out of business.

Data released yesterday warned investors of what to come. The data showed that the UK unemployment rate rose to 4% in February while wages dropped. This was before the severity of the coronavirus pandemic was known. As a result, experts believe that the unemployment rate could top an unprecedented 10%. Another report by the OBR warned that the GDP could drop by more than 30% if the current lockdown extended.

Brexit is still a thorn in the flesh for the UK and British pound. This week, the UK and the European Union are meeting to deliberate on pressing issues like trade, justice, and fishing. Worse, these discussions are happening using video link and time is running out. In a statement to Bloomberg, Ned Rumpeltin of Rabobank said:

“Up until now, the foreign-exchange world has largely been dollar-driven. The return of Brexit risks could become a differentiator for British pound -- beyond the direct impact of the virus.”

GBP/USD technical forecast

Looking at the GBP/USD four-hour chart, we see that the pair found some support at 1.2650 level on Tuesday last week. This price was between the 61.8% and 78.2% Fibonacci retracement level. The price has declined to 1.2275, which is along the 50% Fibonacci retracement level. The pair may continue declining and possibly test the important support of 1.2163.