GBP/USD extends slide to mid-1.28s on broad USD strength

• CPI declines 0.8% in the UK in January.
• Annual-core CPI in the US stays unchanged at 2.2%.
• US Dollar Index recovers above 97 on Wednesday.

The GBP/USD pair came under pressure in the European session after the data published by the UK’s Office for National Statistics showed a more severe slowdown than expected in inflation. Although the pair spiked higher on the back of Brexit headlines and turned positive on the day, the broad USD strength in the second half of the day forced the pair to turn south once again. As of writing, the pair was down 0.32% on the day at 1.2855.

The ONS today reported that the CPI on a monthly basis in January contracted by 0.8% following December’s 0.2% increase. Further details of the report revealed that the annual PPI (output) dropped to 2.1% to miss the market expectation of 2.2% and the Retail Price Index (RPI) edged down to 2.5%. After weakening against its rivals following the disappointing data, the British pound gathered strength and lifted the GBP/USD pair to a daily high of 1.2958.  

Commenting on the data, “From the monetary policy point of view, the inflation dropped below the targeted 2% annual rise in January and therefore remains off the radar. For the Monetary Policy Committee (MPC) at the Bank of England though, what matters more is the inflation outlook and the inflation expectations going beyond 2019. In this perspective, strong UK wage growth is of greater importance as it remains fundamentally the most upwards pressing force in the UK economy. This has also been the point the Bank of England made in its February release of the Inflation report,” said FXStreet European Chief Analyst Mario Blascak said.    

Reports of the EU expecting an official request for an extension on Article 50 revived hopes of the Brexit getting delayed rather than the UK crashing out of the EU. Nevertheless, the positive impact on the currency faded out in the NA session as the USD grabbed markets’ attention with the 10-year Treasury Bond yield adding more than 1% for the third straight day on Wednesday. The US Dollar Index, which finished the previous day 0.4% lower, was last up 0.4% on the day at 97.08.

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