Pound stabilizes as shop inflation drops

The British pound is steady on Tuesday after starting the week with losses. In the European session, GBP/USD is trading at 1.2563, up 0.09%. On Monday, the pound fell 0.57% and dropped as low as 1.2539, its lowest level since February 14.

UK shop inflation eases to 1.3%

Inflation in UK stores fell to 1.3% y/y in March, according the British Retail Consortium (BRC). This was below the 2.5% rise in February and the market estimate of 2.2% and was the lowest level since December 2021. The BRC also reported that food price inflation fell to 3.7% y/y in March, its lowest level since April 2022. This was the 10th straight month that food prices inflation has decelerated.

The data points to headline inflation continuing to fall and has raised expectations for a rate cut from the Bank of England. The markets have priced in a quarter-point cut in June at 62%, with an outside chance of an initial quarter-point cut in May. The BoE has stuck to its script of “higher for longer”, maintaining rates at 5.25% for five straight times, but the March meeting signaled a possible shift in policy.

Governor Bailey said at the March meeting that the UK was “on the way” to winning the battle against inflation but signaled that rate cuts could be on the way. As well, eight MPC members voted to pause and one voted to lower rates at the March meeting, while at the previous meeting, two members voted in favor of a rate hike. The UK releases the March inflation report on April 16th and this release will likely have a significant impact on the BoE’s rate path.

GBP/USD Technical

• GBP/USD is testing support at 1.2605. Below, there is support at 1.2552
• There is resistance at 1.2704 and 1.2757

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