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

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

2011-10-17 19:22:00
David Song, Currency Strategist
Share:

Trading the News: U.K. Consumer Price Index

What’s Expected:

Time of release: 10/18/2011 8:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 4.9%

Previous: 4.5%

DailyFX Forecast:4.6% to 5.0%

Why Is This Event Important:

Consumer prices in the U.K. are projected to increase at an annualized pace of 4.9 percent in September, which would mark the fastest pace of growth since September 2008, and heightening price pressures may spark a bullish reaction in the British Pound as it dampens the prospects for additional monetary support. As the Bank of England maintains its dual mandate to ensure price stability while promoting full-employment, the higher rate of inflation may become a growing concern for the central bank, and the MPC may adopt a wait-and-see approach throughout the remainder of the year in an effort to balance the risks for the region. However, the BoE may continue to talk down the risk for inflation as the slowing recovery dampens the outlook for price growth, and the central bank may keep the door open to expand monetary policy further in an effort to stem the risk of a double-dip recession.

Recent Economic Developments

The Upside

Release

Expected

Actual

Producer Price Index – Input (YoY) (JUL)

17.1%

17.5%

Producer Price Index – Output (YoY) (JUL)

6.2%

6.3%

Net Consumer Credit (AUG)

0.2B

0.5B

The Downside

Release

Expected

Actual

Gross Domestic Product (2Q F)

0.2%

0.1%

Private Consumption (2Q)

-0.3%

-0.8%

Average Weekly Earnings ex Bonus (3MoY) (AUG)

1.9%

1.8%

The rise in producer prices paired with the expansion in consumer credit may encourage businesses to pass on higher costs onto consumers, and a jump in inflation may lead the GBP/USD to extend the rebound from 1.5273 as market participants scale back speculation for additional monetary support. However, the protracted recovery in the U.K. paired with the slowdown in wage growth may lead firms to absorb higher costs, and a soft inflation report may weigh on the sterling as market participants increase bets for more quantitative easing. In turn, the pullback from 1.5751 may gather pace over the remainder of the week, and the exchange rate may threaten the rally from earlier this month as market participants see the BoE carrying its easing cycle into the following year.

Potential Price Targets For The Release

GBPUSD_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot023.png, GBP/USD: Trading the U.K. Consumer Price Report

How To Trade This Event Risk

Expectations for a faster rate of inflation instills a bullish outlook for the sterling, and the market reaction following the release could pave the way for a long GBP/USD trade as market participants scale back speculation for additional monetary support. Therefore, if the headline reading expands 4.9 percent or greater from the previous year, we will need to see a green, five-minute candle subsequent to the report to generate a buy entry on two-lots of GBP/USD. Once these conditions are fulfilled, 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 objective. The second target 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.

On the other hand, the slowdown in economic activity paired with the ongoing weakness within the private sector may encourage businesses to soak up higher costs, and a soft inflation report is likely to weigh on the exchange rate as the central bank keeps the door open to expand monetary policy further. As a result, if consumer prices fall short of market expectations, we will implement the same strategy for a short pound-dollar trade as the long position laid out 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)

AUG 2011

09/13/2011 8:30 GMT

4.5%

4.5%

-8

-12

August 2011 U.K. Consumer Price Index

The headline reading for U.K. increased at an annualized pace of 4.5 percent in August to mark the fastest pace of growth since May, and heightening price pressures may impede on the central bank’s ability to shore up the economy as higher prices sap purchasing power. A deeper look at the report showed prices for clothing and footwear jumped 3.7 percent from the previous month, with transportation costs advancing 1.0 percent, while prices for food and beverages increased 0.1 percent after climbing 0.3 percent in July. Despite the recent rise in consumer prices, the Bank of England may keep the door open to expand monetary policy further as the region faces a slowing recovery, and the MPC may show an increased willingness to increase its asset purchase program beyond the GBP 200B target as the committee sees a growing risk of undershooting the 2 percent target for inflation. The market reaction to the U.K. CPI was fairly mixed as the GBP/USD tipped to a low of 1.5760, but the sterling recouped some of its losses as it closed at 1.5778.

GBPUSD_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot022.png, GBP/USD: Trading the U.K. Consumer Price Report

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

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

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

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