Pound faces crucial test of inflation expectation

Pound bulls after getting hammered by dollar recovery yesterday, faces another crucial test today of consumer inflation expectation. Pound traded as high as 1.544 during early European session, however bears took over from European afternoon as Euro started backing away. Pound is currently trading at 1.532 against dollar, down -0.25% so far today.

UK inflation -

• Consumer inflation expectation in UK have been going down steadily late 2011 in UK, however expectations have gathered pace to downside from last year as oil price fallen. According to March survey inflation expectation dropped to 1.9% from 3.5% in October 2013.

• Realized inflation has also been weaker than expected. In April headline inflation has fallen to negative -0.1% while core inflation weaken further growing just at 0.8% from a year ago. All the measures of inflation in UK has been going down steadily.

Bank of England (BOE) officials including Mr. Mark Carney has maintained rhetoric that BOE will maintain its stance of not following low oil prices and follow suit with further action.

However if inflation expectations keep falling among public, the Bank of England (BOE) risks disinflation expectations getting deeply entrenched and have little choice but to take auction.

Pound is currently trading at 1.532 against dollar, support lies at 1.528 and resistance at 1.543.