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

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

David Song, Strategist

Trading the News: U.K. Consumer Price Index

What’s Expected:

Time of release: 03/19/2013 9:30 GMT, 5:30 EDT

Primary Pair Impact: GBPUSD

Expected: 2.8%

Previous: 2.7%

DailyFX Forecast: 2.7% to 2.8%

Why Is This Event Important:

The headline reading for U.K. inflation is expected to increase an annualized 2.8% after expanding 2.7% in January, and the uptick in price growth may spark a bullish reaction in the British Pound as it dampens the Bank of England’s (BoE) scope to expand the balance sheet further. As the BoE sees a slow but sustainable recovery in Britain, it seems as though the majority of the Monetary Policy Committee will maintain a wait-and-see approach in 2013, but we may see a growing number of central bank officials adopt a more hawkish tone for monetary policy as inflation is expected to run above the 2% target over the policy horizon.

Recent Economic Developments

The Upside

Release

Expected

Actual

BoE/GfK Inflation Survey (12M) (FEB)

--

3.6%

Net Consumer Credit (JAN)

0.2B

0.4B

Jobless Claims Change (JAN)

-5.5K

-12.5K

The Downside

Release

Expected

Actual

Industrial Production (MoM) (JAN)

0.1%

-1.2%

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

1.3%

1.3%

Retail Sales ex Auto Fuel (MoM) (JAN)

0.5%

-0.5%

The budding recovery in the labor market along with the ongoing expansion in private sector credit may push U.K. firms to ramp up consumer prices, and a larger-than-expected uptick in the CPI may instill a bullish outlook for the British Pound as it limits the central bank’s ability to push the asset purchase program beyond the GBP 375B limit. However, subdued wage growth paired with the slowdown in private sector consumption encourage businesses to implement further discounts, and a soft inflation print may drag on the exchange rate as the Monetary Policy Committee keeps the door open to expand monetary policy further.

Potential Price Targets For The Release

Forex_GBPUSD-_Trading_the_UK_Consumer_Price_Report_body_ScreenShot079.png, GBP/USD- Trading the U.K. Consumer Price Report

Daily Chart - Created Using FXCM Marketscope 2.0

As the GBPUSD fails to put in a close below the 61.8% Fibonacci retracement from the 2009 low to high around 1.4840-50, the rebound from 1.4830 should gather pace in the coming days, and the pair may work its way back above the 50.0% retracement (1.5260) should the inflation report dampen expectations for additional monetary support. However, former support may act as new resistance should the print highlight slowing price growth in the U.K., and the pair may continue to consolidate ahead of the BoE Minutes as market participants weigh the outlook for monetary policy.

How To Trade This Event Risk

Faster price growth in the U.K. fosters a bullish outlook for the sterling, and the market reaction may pave the way for a long British Pound trade as it saps bets for more quantitative easing. Therefore, if the headline reading advances 2.8% or greater in February, we will need to see a green, five-minute candle following the release to generate a long trade on two-lots of GBPUSD. 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 hits its mark in an effort to lock-in our gains.

In contrast, the recent weakness in retail sales along with fears of a triple-dip recession may drag on consumer prices, and a soft reading for inflation may spark a sharp selloff ahead of the BoE Minutes as it fuels speculation for more quantitative easing. As a result, if the release falls short of market expectations, we will implement the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

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)

JAN 2013

02/12/2013 9:30 GMT

2.7%

2.7%

-2

+71

January 2013 U.K. Consumer Price Index

Forex_GBPUSD-_Trading_the_UK_Consumer_Price_Report_body_ScreenShot078.png, GBP/USD- Trading the U.K. Consumer Price Report

U.K. consumer prices in the grew an annualized 2.7% for the fourth consecutive month in January, while the core rate of inflation unexpectedly slipped to 2.3% from 2.4% to mark the slowest pace of growth since September. The GBPUSD held relatively flat following the in-line print, but the British Pound tracked higher during the North American trade as the pair ended the day at 1.5659.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. F

ollow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, please follow this link.

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