Cable tumbled in morning London trade today following the release of cooler than expected inflation data which suggested that the BoE may have more scope to ease monetary policy in the near term.

UK CPI slipped to -0.1% on a month over month basis dropping ot 2.8% y/y versus 3.0% eyed. RPI remained unchanged but slipped to 3.1% versus 3.3% forecast. The drop was caused mainly by sharp declines in oil and food.

This is the lowest UK inflation reading since December of 2009 and a massive 240 basis point drop in headline data in just 8 months indicating that price pressures in the UK economy are clearly easing. The news will provide cover for the BoE to consider more aggressive monetary stimulus measures as threat of nagging inflation appears to be passing.

GBP/USD dropped to a low of 1.5617 in the wake of the news but has since recovered some of its losses rising back to 1.5950 in mid-morning London dealing. Although typically any new QE measures are taken negatively by the currency market, in the current low rate, lackluster growth environment additional monetary easing is seen as stimulative for risk assets and therefore may prove to be be positive for GBP/USD in the end. If risk flows remain constructive into the North American session cable may recover the 1.5700 barrier as short squeeze continues.

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