British pound fell to its lowest level versus the dollar in almost two months as the UK inflation report showed October consumer prices increased only by 2.2% y/y (forecast: 2.5%; prior: 2.7%). Lower inflation has reduced the expectations of a sooner-than-expected BoE policy tightening.
GBP/USD broke below the key $1.5900 support, testing $1.5850. As can be seen from the monthly chart, the pair slipped to the bottom of the Ichimoku Cloud and remains supported by the 50-months MA. It is interesting to note that the cable has finally closed the bullish mid-September gap.
What next for the sterling? Investors are now waiting for November quarterly inflation report and unemployment rate to be released tomorrow. Given the recent positive economic developments, the policymakers are likely to move the expectations of reaching a 7%-unemployment threshold forward from to Q2 of 2016 to Q4 of 2015. In this case, today's GDP drop could turn out to be a false breakout of the support.
Most analysts also expect the BoE to revise the GDP growth forecasts to the upside:
“BoE’s growth forecast is likely to be revised higher and a faster decline in unemployment is likely to be anticipated,” BBH strategists say. “Even if the medium-term inflation forecast is lowered, the market appears to be discounting the likelihood of a rate hike late next year or arguably early 2015.”