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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: 07/16/2013 8:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: 3.0%

Previous: 2.7%

DailyFX Forecast: 2.9% to 3.2%

Why Is This Event Important:

The headline reading for U.K. inflation is expected to increase an annualized 3.0% in June, which would mark the fastest pace of growth since April 2012, and the uptick in price growth may prop up the British Pound as it dampens the Bank of England’s (BoE) scope to expand the balance sheet further. Indeed, it seems as though the majority of the Monetary Policy Committee is slowly moving away from the easing cycle as they see a slow but sustainable recovery in Britain, and we may see the central bank continue to operate under its inflation-targeting framework as price growth is expected to hold above the 2% target over the policy horizon.

Recent Economic Developments

The Upside

Release

Expected

Actual

Retail Salees ex Auto Fuel (MoM) (MAY)

1.0%

2.1%

Jobless Claims Change (MAY)

-5.0K

-8.6K

Average Weekly Earnings (3MoY) (APR)

0.2%

1.3%

The Downside

Release

Expected

Actual

Manufacturing Production (MoM) (MAY)

0.4%

-0.8%

Producer Price Index – Input n.s.a. (YoY) (MAY)

2.5%

2.2%

Producer Price Index – Output n.s.a. (YoY) (MAY)

1.4%

1.2%

The pickup in private sector consumption along with the improvement in the labor market may push U.K. firms to hike consumer prices, and heightening price pressures may push the BoE to adopt a more hawkish tone for monetary policy as price growth has held above target since December 2009. However, easing input costs paired with the slowdown in business outputs may drag on inflation, and a soft CPI print may renew bets for more quantitative easing as Governor Mark Carney looks to encourage a stronger recovery.

Potential Price Targets For The Release

Forex_GBPUSD-_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot154.png, GBP/USD- Trading the U.K. Consumer Price Report

As the GBPUSD finds key support around the 61.8% Fibonacci retracement from the 2009 low to high around 1.4850, a strong CPI print may spark a more meaningful run at the 50.0% retracement (1.5270), and the sterling may continue to retrace the decline from earlier this year should the data dampen speculation for additional monetary support. However, a weaker-than-expected inflation report may push the sterling back to support, and we may see the BoE take additional steps to shore up the ailing economy in an effort to instill a stronger recovery.

How To Trade This Event Risk

Forecasts for a faster rate of inflation instills a bullish outlook for the sterling, and a positive development may pave the way for a long British Pound trade as it dampens the scope for more QE. Therefore, if price growth expands an annualized 3.0% or greater in June, we will need to see a green, five-minute candle following the release to establish 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 generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade hits its mark in order to preserve our profits.

On the other hand, the easing input costs along with the persistent slack in the real economy may drag on inflation, and a weak CPI print may spark a sharp selloff ahead of the BoE Minutes as it renews bets for further monetary support. As a result, if the headline reading for inflation falls short of market expectations, we will carry out 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)

MAY 2013

06/18/2013 8:30 GMT

2.6%

2.7%

-34

-47

May 2013 U.K. Consumer Price Index

Forex_GBPUSD-_Trading_the_U.K._Consumer_Price_Report_body_ScreenShot152.png, GBP/USD- Trading the U.K. Consumer Price Report

U.K. consumer prices increased an annualized 2.7% in May after expanding 2.4% the month prior, while the core rate of inflation climbed 2.2% amid forecasts for a 2.1% print. Despite the higher-than-expected print, the British Pound struggled to hold its ground, with the GBPUSD slipping back below the 1.5675 region, and the sterling weakened further throughout the day as the pair closed at 1.5642.

--- 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, please follow this link.

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