Bearish Inflation Outlook Drives GBP/USD Lower

The GBP/USD reversed course on Wednesday to finish lower. The Forex pair broke from a two-year high after Bank of England member Martin Weale said that a drop in inflation since this summer has been “sharp and unexpected”.  In a speech before the National Institute of Economic and Social Research in London, Weale warned that a decline in inflation means the BoE is likely to stay the course and make no changes to its current forward guidance policy.

Traders had been driving up the Sterling against the dollar as the U.K. economy headed up. Speculators were betting the hot economy would encourage the central bank to hike its benchmark interest rate sooner than expected.

Today’s action suggests investors are using the Weale comment as an excuse to take profits in a market that was technically overbought before today’s session.

The weaker U.S. Dollar helped drive up the Euro for the seventh consecutive session. Upside momentum is strong enough to drive the EUR/USD into the 1.3832 October 25 top over the near-term. The Euro should continue to strengthen against the dollar since there is uncertainty over the timing of the Fed’s plan to begin reducing monetary stimulus.

Although investors are expressing worries, the price action suggests the central bank will refrain from tapering in December. At the same time, comments from European Central Bank President Mario Dragi after last week’s central bank policy meeting seem to suggest the ECB is not considering additional stimulus at this time. This makes the Euro a more favorable currency over the dollar.

February Gold weakened on Wednesday after yesterday’s strong surge turned the main trend to up on the daily chart. Gold is getting support from a falling dollar. If investors continue to bet against an early Fed tapering then look for the Greenback to fall further, underpinning gold over the near-term. Based on the current upside momentum, a rally to the retracement zone at $1286.20 to $1304.16 seems like a reasonable objective.

Technically overbought conditions and worries about Fed tapering helped drive January Crude Oil lower early in the session. However, losses are being pared by traders reacting to the news that the weekly data from the U.S. Energy Information Administration showed that crude supplies fell by 10.6 million barrels for the week-ended December 6. Analysts were looking for a decline of 2.8 million barrels.

If the market can reverse course and close higher for the session then look for the rally to resume with $99.86 the next likely upside target.