The GBP/USD managed a small bounce on mixed inflation data and stayed just above 1.67.
The batch of price data out of the United Kingdom on Tuesday produced volatility initially for the GBP/USD. A spike lower was quickly reversed, allowing the pair to stay above the support level marked by the 200-day moving average at 1.6689. It later managed to hold at around 1.6720.
UK data showed that CPI inflation fell to 1.6% in March from 1.7%, the lowest since October 2009. Economic research firm Capital Economics noted that the data was likely not affected by the timing of Easter, partly because most prices for the month were recorded in the middle of March last year. Additionally, it added that lower producer prices, also released on Tuesday, suggest that price pressures in the inflation pipeline are still extremely weak.
"Since annual growth in average earnings was 1.7% in January, and has probably strengthened since, consumers' pay is finally rising again in real terms (on the CPI measure at least)," they said.
"Looking ahead, we continue to think that a combination of stable commodity prices, falling import prices and recovering productivity will push CPI inflation as low as 1% before the year is out. This would provide more solid foundations for the recovery in consumer spending and enable the MPC [Bank of England's Monetary Policy Committee] to keep the Bank Rate at 0.5% until late 2015."
On the other hand, investors may be more concerned about rising house prices. The DCLG House Price Index rose by 9.1% compared to a year earlier and exceeded market expectations for a 7.2% increase. The increase was the highest since June 2010.
According to Howard Archer, an economist at IHS Global Insight, the Bank of England may very well take further action later this year to try and dampen the housing market.
Signs of a housing bubble increases expectations for an interest rate hike by the central bank, which in turn places upwards pressure on the pound.
A poll released by YouGov, an international internet-based market research firm, also found that 55% of adults in London said housing should be a priority for Mayor Boris Johnson.
Just last week, The Economist published an article on how rising property prices could force the Bank of England to intervene. The publication listed two possible options to cool the housing market, such as stricter vetting of borrowers to curb the size of new loans and more vigorous stress tests of mortgage lenders.
It cites Spencer Dale, chief economist at the Bank of England, who compared the UK's housing market to food in a microwave because it can "turn from lukewarm to scalding hot in a matter of a few economic seconds".