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GBPUSD- U.K. Inflation Report to Make or Break British Pound

GBPUSD- U.K. Inflation Report to Make or Break British Pound

2013-08-13 04:00:00
David Song, Strategist

Trading the News: U.K. Consumer Price Index

The U.K. Consumer Price report could be a game-changer for the British Pound as the Bank of England (BoE) adopts forward-guidance for monetary policy.

What’s Expected:

Time of release: 08/13/2013 8:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: 2.8%

Previous: 2.9%

DailyFX Forecast: 2.8% to 3.0%

Why Is This Event Important:

Given the BoE’s track record of struggling to achieve the 2% target for inflation, a stronger-than-expected inflation report may heighten the scope of seeing the central bank implement its exit strategy ahead of schedule, but a slower rate of price growth may trigger a sharp selloff in the GBPUSD should the data raise the Monetary Policy Committee’s (MPC) scope to retain its highly accommodative policy stance.

The Upside/Bullish Scenario

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (JUN)

0.2%

0.2%

Jobless Claims Change (JUN)

-8.0K

-21.2K

Average Weekly Earnings inc Bonus (3MoY) (MAY)

1.4%

1.7%

Bright signs coming out of the U.K. economy may prompt businesses to hike consumer prices, and a faster rate of price growth may dampen speculation for additional monetary support as the BoE adds the inflation ‘knock-out’ to its forward guidance.

The Downside/Bearish Scenario

Release

Expected

Actual

BRC Shop Price Index (JUL)

--

-0.5%

Net Consumer Credit (JUN)

0.7B

0.5B

CBI Business Optimism (JUL)

8

7

Nevertheless, U.K. firms may offer discounted prices in order to draw increased demands, and a marked slowdown in consumer prices may threaten the bullish trend in the GBPUSD as Governor Mark Carney keeps the door open to expand the Asset-Purchase Facility (APF) beyond the GBP 375B limit.

How To Trade This Event Risk

Expectations for a slower rate of inflation casts a bearish outlook for the sterling, but a positive development may set the stage for a long British Pound trade as it raises the BoE’s scope to implement its exit strategy ahead of schedule. Therefore, if the headline and core reading for inflation tops market expectations in July, we will need to see a green, five-minute candle following the release to consider a long entry on two-lots of GBPUSD. Should the market reaction favor a long trade, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and we will use this risk to 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 preserve our profits.

On the other hand, the persistent margin of slack in the real economy may drag on consumer price growth, and a soft CPI print may trigger a sharp selloff ahead of the BoE Minutes as it heightens bets for more quantitative easing. As a result, if the headline reading for inflation slips to 2.8% or lower, we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in the opposite direction.

Potential Price Targets For The Release

Forex_GBPUSD-_U.K._Inflation_Report_to_Make_or_Break_British_Pound_body_ScreenShot283.png, GBPUSD- U.K. Inflation Report to Make or Break British Pound

A slower rate of inflation may spark a more meaningful pullback in the GBPUSD, and we may see the pound-dollar threaten the bullish trend carried over from the previous month should the data raise bets for more QE. However, an upside surprise in the U.K. Consumer Price report may spark a bullish breakout in the exchange rate, and the GBPUSD may work its way back towards the 38.2% Fibonacci retracement of the 2009 range as limits the BoE’s scope to retain its highly accommodative policy stance.

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 2013

07/16/2013 8:30 GMT

3.0%

2.9%

-30

+57

June 2013 U.K. Consumer Price Index

Forex_GBPUSD-_U.K._Inflation_Report_to_Make_or_Break_British_Pound_body_ScreenShot282.png, GBPUSD- U.K. Inflation Report to Make or Break British Pound

The headline reading for U.K. inflation increased an annualized 2.9% in June after expanding 2.7% the month prior, while the core rate climbed to 2.3% from 2.2% to mark the fastest pace of growth since March. The weaker-than-expected CPI print dragged on the British Pound, with the GBPUSD slipping below the 1.5050 region, but the sterling regained its footing during the day to closed at 1.5157.

--- 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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