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

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

David Song, Strategist

Trading the News: U.K. Consumer Price Index

What’s Expected:

Time of release: 06/18/20138:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: 2.6%

Previous: 2.4%

DailyFX Forecast: 2.5% to 2.7%

Why Is This Event Important:

U.K. Consumer Prices are projected to increase an annualized 2.6% in May and a faster rate of inflation may spark a near-term rally in the British Pound as it dampens speculation for more quantitative easing. As the U.K. skirts a triple-dip recession, we should see the Bank of England (BoE) keep the Asset-Purchase Facility (APF) capped a t GBP 375B, and we may see a growing number of central bank officials adopt a more hawkish tone for monetary policy as the region is expected to face above-target inflation over the policy horizon.

Recent Economic Developments

The Upside

Release

Expected

Actual

Jobless Claims Change (APR)

-5.0K

-8.6K

Average Weekly Earnings ex Bonus (APR)

0.8%

0.9%

Net Consumer Credit (APR)

0.4B

0.5B

The Downside

Release

Expected

Actual

CBI Reported Sales (MAY)

3

-11

Retail Sales ex Auto Fuel (MoM) (APR)

0.1%

-1.4%

Producer Price Index- Input n.s.a. (YoY) (APR)

0.3%

-0.1%

Firms in the U.K. may raise consumer prices amid the expansion in private sector lending along with the ongoing improvement in the labor market, and a marked uptick in inflation should heighten the appeal of the sterling as market participants scale back bets for additional monetary support. However, easing input costs paired with the slowdown in household spending may prompt businesses to conduct further discounts in order to draw demands, and the BoE may keep the door open to expand the balance sheet further in an effort to encourage a stronger recovery.

Potential Price Targets For The Release

Forex_GBPUSD-_Trading_the_U.K._Consumer_Price_Index_body_ScreenShot063.png, GBP/USD- Trading the U.K. Consumer Price Index

Although the relative strength index on the GBPUSD is coming up against overbought territory, the rebound off of 78.6% Fibonacci expansion (1.5610-20) from the March advance may trigger a run at the 100% expansion around 1.5780, and the sterling may continue to recoup the losses from earlier this year should the data further dampen the BoE’s scope to implement more quantitative easing. However, a dismal CPI print may spark a near-term correction in the exchange rate, and we may see a move back towards 61.8% expansion around 1.5480-90 to test for interim support.

How To Trade This Event Risk

Expectations for a faster rate of inflation instills a bullish outlook for the sterling, and a strong print may pave the way for a long British Pound trade as it dampens the scope for additional monetary support. Therefore, if price growth expands an annualized 2.6% or greater in May, we will need a green, five-minute candle following the report to generate a long entry on two-lots of GBPUSD. 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 hits its mark in order to lock-in our profits.

In contrast, the persistent slack in the real economy along with the slowdown in retail sales may drag on price growth, and a weak CPI print may spark a sharp selloff ahead of the BoE Minutes as it renews speculation for more easing. As a result, if the headline reading for inflation disappoints, 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)

APR 2013

05/21/2013 8:30 GMT

2.6%

2.4%

-30

-63

April 2013 U.K. Consumer Price Index

Forex_GBPUSD-_Trading_the_U.K._Consumer_Price_Index_body_ScreenShot062.jpg, GBP/USD- Trading the U.K. Consumer Price Index

The headline reading for U.K. inflation slipped to an annualized 2.4% from 2.8% in March to mark the slowest pace of growth since September, while the core rate narrowed to 2.0% during the same period amid forecasts for a 2.3% print. Indeed, the slowdown in price growth dragged on the British Pound, with the GBPUSD slipping below the 1.5300 handle, and the sterling struggled to hold its ground throughout the North American trade as the pair ended the day at 1.5149.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

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