Low UK Inflation Favours Conservative Party

Inflation in the United Kingdom fell to zero for the first time on record on March 24 with the release of the consumer price index (CPI) figures. Food and energy prices have fallen potentially given British consumers a higher disposable income. Given the general elections environment the inflation data is a positive for David Cameron’s government as it gives it an edge versus the attacks from Labour on higher costs of living.

The UK CPI will be released on Tuesday, April 14 at 4:30 am EDT. The GBP/USD finished the week lower after the fallout from the disappointing U.S. job report was finally digested as more markets came back from the Easter holiday. The pair started the week close to 1.50 after the rapid depreciation of the USD versus all major pairs. As the week progressed the USD found its legs and gained traction to finish the week versus the GBP at 1.4623.

With the U.K. election campaigns underway the CPI release takes political connotations as it could strengthen the case for Conservatives. The Bank of England did not change rates or the size of its stimulus program and will not do so until after the elections when the political picture is fully formed. The outcome of the U.K. elections has plenty of economic implications which is why it is one of the biggest risks to global growth. A conservative victory might mean the end of the British Isles membership in the European Union as Cameron will push a referendum if he wins. A Labour victory on the other hand could bring higher taxes to foreign investors making the GBP less attractive.

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