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

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

2011-08-12 20:17:00
David Song, Strategist
Share:

Trading the News: U.K. Consumer Price Index

What’s Expected:

Time of release: 08/16/2011 8:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 4.3%

Previous: 4.2%

DailyFX Forecast: 4.2% to 4.5%

Why Is This Event Important:

Consumer prices in the U.K. are projected to increase at an annualized pace of 4.3% in July, and the faster rate of inflation could spark a bullish reaction in the British Pound as the Bank of England faces increased pressures to lift the benchmark interest rate off of the record-low. As price pressures intensify, BoE board members Spencer Dale and Martin Weale may continue to push for a 25bp rate hike, and the MPC may show an increased willingness to start normalizing monetary policy as it maintains its dual mandate to ensure price stability while promoting full-employment. However, the slowing recovery in Britain may encourage the central bank to carry its current policy into the following year, and the BoE may keep the door open to expand its asset purchase program beyond the GBP 200B target in an effort to stimulate the ailing economy.

Recent Economic Developments

The Upside

Release

Expected

Actual

Producer Price Index – Output (YoY) (JUL)

5.8%

5.9%

Net Consumer Credit (JUN)

0.3B

0.4%

Retail Sales ex Auto Fuel (MoM) (JUN)

0.5%

0.8%

The Downside

Release

Expected

Actual

Visible Trade Balance (JUN)

-8.100B

-8.873B

M4 Money Supply (YoY) (JUN)

--

-0.7%

GfK Consumer Confidence Survey (JUL)

-26

-30

Potential Price Targets For The Release

GBPUSD_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot008.png, GBP/USD: Trading the U.K. Consumer Price Report

How To Trade This Event Risk

Projections for a higher rate of inflation reinforces a bullish outlook for the sterling, and the market reaction to the report could set the stage for a long British Pound trade as investors weigh the outlook for future policy. Therefore, if consumer prices increase at an annualized pace of 4.3% or greater, we will need to see a green, five-minute candle following the release to generate 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 establish 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 lock-in our profits.

On the other hand, the slowing recovery in the U.K. may bear down on price growth and a below-forecast CPI print could weigh on the exchange rate as the central bank keep the door open to expand monetary policy further. As a result, should the headline reading for inflation hold cross the wires at 4.2% or less, we will implement the same strategy for a short pound-dollar trade as the long position mentioned above, just in the opposite direction.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUN 2011

07/12/2011 8:30 GMT

4.5%

4.2%

-2

+58

June 2011 U.K. Consumer Price Index

The headline reading for U.K. inflation unexpectedly slowed to 4.2% in June from 4.5% in the previous month, while core consumer prices increased at an annualized pace of 2.8% to mark the slowest pace of growth since November 2010. A deeper look at the report showed a 0.3% rise in transportation costs paired with a 0.9% rise in food prices, while prices for clothing and footwear slumped 1.9% during the month. In light of easing price pressures, the Bank of England may show an increased willingness to maintain its wait-and-see approach throughout the second-half of the year, and the central bank may carry its current policy into 2012 as the U.K. faces a slowing recovery. In turn, the MPC may open the door to expand monetary policy further, and we may see a growing shift within the committee as growth and inflation cool. The British Pound sold off immediately following the report, with the GBP/USD slipping below 1.5800, but the market reaction was certainly short-lived as the pair ended the day at 1.5910.

GBPUSD_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot001.png, GBP/USD: Trading the U.K. Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

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

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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