Pound bulls worry on deflationary pressure

Pound is failing to determine direction as several fundamental forces remain in play.

Pound performed relatively well since fourth quarter GDP surprised on the upside. GDP for fourth quarter was up 3% YoY and 0.6% QoQ, both much better than what economists were projecting.

• In spite of better GDP numbers, recovery is not broad based. Services remain the only sector that has reached beyond pre-crisis level.
  
  
• Services sector doing very well, as evident by Markit services PMI released yesterday. PMI came at 58.9 much better than previous 56.7 and 57 expected.

However, pound rallies are getting soured as market participants remain worried about continuing deflationary pressure and upcoming election.

• Latest BRC-Nielsen shop price index, which is a measure of inflationary pressure dived deeper to negative zone. Prices reached to new record low. Chart courtesy Soberlook.com.
  
  
• Price drop accelerated to -2.1% in March, compared to -1.7% in February. This is 23^rd consecutive monthly decline in prices.
  
  
• Food items registered deflation in tune of -0.9%, whereas non-food item dropped -2.8%.

While consumers in Britain is enjoying these eye catching bargains on foods, electricals, clothes, policy debate is probably heating up inside Bank of England (BOE), whether to act or not.

BOE officials so far maintained their stance of not acting on the effects of lower oil price, chief economist Mr. Haldane raised possibilities of a rate cut last month. Either way, a rate hike seem to far-fetched for now.

Lacking policy clarification, GBP/USD will be taking cues from dollar side for now. Pound is trading at 1.489 against dollar, up 0.53% today.