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GBP/USD: Trading the U.K. Consumer Price Report

GBP/USD: Trading the U.K. Consumer Price Report

2011-07-11 21:47:00
David Song, Strategist

Trading the News: U.K. Consumer Price Index

What’s Expected:

Time of release: 07/12/20118:30 GMT, 4:30 EST

Primary Pair Impact:GBPUSD

Expected: 4.5%

Previous: 4.5%

DailyFX Forecast: 4.4% to 4.7%

Why Is This Event Important:

The headline reading for U.K. inflation is expected to increase at an annualized 4.5% for the third month in June, and the lack of heightening price pressures could spark a bearish reaction in the British Pound as market participants scale back speculation for higher interest rates. As Britain faces a slowing recovery, the ongoing weakness within the real economy certainly dampens the outlook for inflation, and the Bank of England may continue to endorse a wait-and-see approach in the second-half of the year as the central bank aims to balance the risks for the region. In turn, the MPC may see a risk of undershooting the 2% target for inflation, and the policy meeting minutes may show an increased willingness to expand monetary policy further as the economic outlook remains clouded with uncertainties.

Recent Economic Developments

The Upside




Producer Price Index – Input (MoM) (JUN)



Producer Price Index – Output (MoM) (JUN)



Manufacturing Production (MoM) (MAY)



The Downside




GfK Consumer Confidence Survey (JUN)



Net Consumer Credit (MAY)



Retail Sales ex Auto Fuel (MoM) (MAY)



As businesses in the U.K. face higher commodity prices, firms may pass on rising costs onto consumers, and a faster rate of inflation may lead the BoE to drop its dovish outlook for monetary policy as heightening price pressures sap purchasing power for Britons. However, firms may absorb higher costs as private sector consumption wanes, and household confidence may deteriorate further in the second-half of 2011 as the central bank maintains a cautious outlook for the region. As the BoE continues to highlight the ongoing weakness within the private sector, central bank Governor Mervyn King may see scope to expand the asset purchase target beyond GBP 200B, and there could be a growing shift within the MPC as policy makers aim to encourage a sustainable recovery.

Potential Price Targets For The Release

GBPUSD_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot064.png, GBP/USD: Trading the U.K. Consumer Price Report

How To Trade This Event Risk

Trading the given event risk is certainly not as clear cut as some of our previous trades as the headline reading for inflation is expected to hold steady for the third month June, but heightening price pressures could set the stage for a long British Pound trade as market participants expect the BoE to start normalizing monetary policy over the medium-term. Therefore, if the CPI increases at an annualized pace of 4.6% or higher, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, firms may show an increased willingness to absorb higher costs in order to encourage household consumption, and a softer reading for inflation could spark a selloff in the sterling as interest rate expectations deteriorate. As a result, if the CPI holds steady at 4.5% or unexpectedly weakens from the previous month, we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

Impact that the U.K. Consumer Price report has had on GBP during the last month


Data Released



Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2011

06/14/2011 8:30 GMT





May 2011 U.K. Consumer Price Index

Consumer prices in the U.K. expanded at an annualized pace of 4.5% for the second consecutive month in May, while the core rate of inflation increased 3.3% from the previous year amid forecasts for a 3.5% rise. The breakdown of the report showed energy prices increased 9.9% from last year, with the cost of food, alcohol and tobacco rising 6.9%, while prices for clothing and footwear climbed an annualized 1.2%. The fastest pace of price growth since October 2008 has certainly put increased pressures on the Bank of England to increase the benchmark interest rate off of 0.50%, but the central bank looks as though it will continue to endorse its wait-and-see approach in the second-half of the year as the U.K. faces a slowing recovery. Indeed, the British Pound pushed back above 1.6400 as the headline reading for inflation came in-line with expectations, but the initial reaction was certainly short-lived, with the exchange rate falling back to settle at 1.6367 at the end of the day.

GBPUSD_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot063.png, GBP/USD: Trading the U.K. Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

Join Technical Currency Strategist Joel Kruger in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

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