Inflation Lowest Since 2016

UK inflation fell by almost half last month, tumbling from 1.5% in March to just 0.8% in April as the COVID-19 fallout continues to wreak havoc on the economy. The decline has taken inflation back to its lowest level since mid-2016 and highlights the heavy downside drag being caused by the ongoing economic disruption as a result of the COVID-19 lock-downs which, though eased somewhat, are still in effect in the UK.

Energy Prices The Key Driver

Explaining the drop, the Office for National Statistics attributed it largely to the down-ward move in energy prices over the last month. The report showed that petrol prices hit their lowest level in four years in the UK between march and April falling by 10.4%. Looking at the same period last year, where petrol prices rose by 3.8% over the month, the severity of the situation is clear.

However, the ONS did note that the sharp increase in prices for recreational goods helped to partially offset the energy price declines. The report also pointed to discounting as one of the key drivers of the sump in prices, saying: “For garments, prices overall fell by 2.3% between March and April 2020 compared with a small increase of 0.4% a year ago. There were a greater number of items recorded as being discounted this year, when compared with April 2019, with reductions across a range of women’s and men’s clothing items.

The larger number of items recorded as being on sale could reflect retailers’ efforts to encourage online purchases or potential difficulties as a result of the current economic situation. “

Core inflation, which strips out energy and food prices, was also seen lower over the month. However, falling to 1.4% from the prior month’s 1.6%, the decline was not nearly as pronounced as the decline in the headline reading, reflecting the heavy contribution from the energy price slide.

BOE Easing Expectations Rising

The data, which comes on the back of yesterday’s UK labour market data showing the largest monthly rise in jobless claims on record, has further increased expectations of continued BOE easing. The BOE held policy levels unchanged at its last meeting though warned that it would continue to assess incoming data and act as necessary. Given that lock-down measure shave only been partially eased over May, the data for this month is likely to be extremely weak also, creating more instability in the economy and raising the chances of further BOE intervention.

Technical Views

EURGBP (Bullish above .8861)

From a technical viewpoint. The rally in EURGBP has seen price breaking above the .8861 resistance level. With VWAP now positive, any retest of this level is likely to provide support for a continued push higher towards the .9097 where confluence between structural highs and the yearly R1 should see some selling interest on the initial approach.

UK Data Goes From Bad To Worse

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