trading news reports

U.K. CPI On Tap - Can Higher Inflation Spur Bullish Sentiment for the Pound?

Monday, 13 October 2008 12:02:05 GMT  |  David Song, Currency Analyst

Inflation in the U.K. is anticipated to increase to 5.0% from 4.7% in August despite the recent plunge in commodity prices. Indeed mounting prices pressures have sapped purchasing power for consumers throughout the year, which led the Bank of England to hold the benchmark interest rate steady at 5.00% since April.

Trading the News: U.K. Consumer Prices

 

What’s Expected

Time of release:                  10/14/2008 08:30 GMT, 04:30 EST

Primary Pair Impact :          GBPUSD

Expected:                              5.0%

Previous:                               4.7%

How To Trade This Event Risk

 

Inflation in the U.K. is anticipated to increase to 5.0% from 4.7% in August despite the recent plunge in commodity prices. Indeed mounting prices pressures have sapped purchasing power for consumers throughout the year, which led the Bank of England to hold the benchmark interest rate steady at 5.00% since April. The September 4^th board meeting minutes showed that the MPC voted 8-1 to leave the interest rate unchanged amid the slowdown in the economy, with Governor Mervyn King noting that he expected inflation to remain ‘markedly’ above target going into the next year. However, the recent downturn in the global financial market paired with the rising growth concerns  for the global economy has pushed the central bank to unexpectedly lower the interest rate by 50bp to 4.50% last week, which was the biggest reduction by the bank in seven years. The actions taken on by the BoE has certainly fueled expectations for further easing to follow as the economy teeters on the brink of a recession. In fact, economic activity in Europe’s second largest economy stalled in the second quarter, with Governor King stating that the he expects economic growth to remain ‘broadly flat’ well into 2009. Furthermore, the unemployment rate surged to a 16 year high as jobless claims surged 32.5K to 904.9K in August, which only strengthens the argument for the BoE to lower rates further as growth prospects deteriorate. Overnight index swaps are showing that market participants expect the BoE to cut at least 125bp over the next 12 months as economy may slip into a recession by the end of the year.

 

Despite increased expectations for further easing, the British pound has fallen drastically against the U.S. dollar in the past few weeks, and a rise in price pressures could setup the pair for a retracement. Therefore, a headline reading of 5.0% or greater would favor a long trade for the GBPUSD, and we will look for a green, five-minute candle following the release to confirm entry on two lots of the pair. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

 

On the other hand, easing prices pressures paired with fading growth prospects could weigh on the pound further, and would favor a short position for the GBPUSD. We will follow the same strategy for a short as the long mentioned above, just in reverse.

  Related Stories:

U.K. Treasury to Inject GBP 37B in RBS, Lloyds TSB, and HBOS

Euro and Pound Strengthen As European Governments Take Measures To Bailout Banks

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