Weak inflation set to break pound lower

Today inflation reading will be published from UK at 9:30 GMT. Data set includes Consumer Price index (CPI), producer price index (PPI), and retail price index (RPI) and house price index (HPI).

• Inflation readings will be closely monitored by both markets and officials at Bank of England (BOE) as it remains key concern of Bank of England (BOE), before it considers raising rates.

• However, Bank of England (BOE) Governor Mark Carney and other officials have clearly indicated no appetite for further stimulus as they blame the drop in CPI to lower energy prices.

• In latest reporting Bank of England (BOE) has pushed back their inflation and rate hike expectation. According to the report inflation may not shoot the upward boundary even if BOE doesn't hike rates even in next year.

Past trends -

• CPI has been hovering close to zero percent for months now. In January reading was deep in negative territory, fell by -0.9% m/m, bounce back since in February and March. Yearly growth in CPI has been negative for first time in April in at least 50 years. However it has stabilized near zero since then. CPI was down -0.1% y/y in September.
   
• PPI is broadly under downside pressure due lower input costs thanks to lower commodity prices. PPI was -1.8% y/y in September.
   
• RPI last year mostly remained in positive territory however in later half of the year and especially February saw sharp decline. RPI after moving to positive territory since March dipped into negative in July but jumped up to 0.5% in August. In September, RPI was 0.8% y/y in September.

Expectation today -

• CPI is expected to grow 0.1% m/m but drop -0.1% y/y.
• PPI is expected to show no growth on monthly basis.
• RPI is expected to soften to grow 0.1% m/m and 0.9% y/y.
• House prices are also expected to move up in October by 5.4% from a year ago.

Market impact -

• Better than expected inflation reading would provide additional boost to pound, which is struggling against USD.
• Weaker inflation reading would be cue for sellers to go further short in Pound.

Pound is currently trading at 1.518 against dollar, while resistance remains around 1.527-1.53 area and support around 1.5 psychologically vital level.