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A relatively subdued overnight session, the main exceptions being the yen and oil. Crude is now touching the USD 45 level on the front month Brent contract, whilst the yen has net-net softened on mild speculation that further stimulus measures are in the pipeline. Focusing on the oil price, we are likely to see further signs of the impact of this on the UK inflation data. The positive impact from reducing the burden on consumers and freeing up income to spend elsewhere has received less attention so far, but it is worth watching the activity numbers more closely in coming weeks to see what impact It has. In the end, it becomes a balancing act between the deflationary and income effects.

The main focus today will be with the latest UK inflation data, where the headline rate is seen falling to 0.7% and potentially even lower. Perhaps even more important is what happens to the core rate, which is not pulled around try the volatility in energy prices. This has fallen from 2% a year ago to 1.2% in November, with a small increase to 1.3% anticipated for today’s release. If this is steady or lower, then sterling is more likely to move lower on a sustained basis.

Further reading:

UK inflation plunges to 0.5% – lowest since 2000 – GBP/USD follows

Forex Traders, Time to Get Back to Basics