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Trading U.K. CPI- British Pound at Risk for Larger Correction

Trading U.K. CPI- British Pound at Risk for Larger Correction

David Song, Strategist

- U.K. Inflation to Slow for the Second-Month in August

- Core Consumer Price Growth to Rebound from 2013 Low

Trading the News: U.K. Consumer Price Index

The U.K. Consumer Price report may trigger a more meaningful correction in the GBPUSD as a slower rate of inflation raises the Bank of England’s (BoE) scope to retain its highly accommodative policy stance.

What’s Expected:

Time of release: 09/17/2013 8:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: 2.7%

Previous: 2.8%

DailyFX Forecast: 2.7% to 3.0%

Why Is This Event Important:

In light of the fresh remarks coming out of the BoE Testimony, it seems as though the central bank will toughen its stance to achieve the 2% target for price growth, and the central bank may start to adopt a more hawkish tone for monetary policy as it continues to operate under its inflation-targeting framework.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

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

1.3%

1.1%

BRC Shop Pirce Index (YoY) (AUG)

--

-0.5%

CBI Trends Selling Price (AUG)

3

0

Nevertheless, businesses in the U.K. may continue to offer discounted prices amid the slowdown in wage growth along with the persistent slack in the real economy, and a soft inflation print may prompt a near-term reversal in the GBPUSD as market participants scale back bets of seeing the BoE move away from its easing cycle.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Jobless Claims Change (JUL)

-21.0K

-32.6K

Net Consumer Credit (JUL)

0.6B

0.6B

Retail Sales inc Auto (MoM) (JUL)

0.7%

1.1%

However, the recent pickup in private sector activity may encouraged stronger price growth in the U.K., and a better-than-expected CPI print may spark fresh monthly highs in the British Pound as we see a growing number of central bank officials turn upbeat towards the economy.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. CPI Narrows to 2.7% or Lower

  • Need red, five-minute candle following the print to consider a short GBPUSD trade
  • If market reaction favors a sell trade, short GBPUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish GBP Trade: Headline & Core Inflation Tops Forecast

  • Need green, five-minute candle to favor a long GBPUSD trade
  • Implement same setup as the bearish British Pound trade, just in opposite direction

Potential Price Targets For The Release

GBPUSD Daily

Forex_Trading_U.K._CPI-_British_Pound_at_Risk_for_Larger_Correction_body_Picture_2.png, Trading U.K. CPI- British Pound at Risk for Larger Correction

Chart - Created Using FXCM Marketscope 2.0

  • Upward Trending Channel Dating Back to July Continues to Take Shape
  • Relative Strength Index Retains Bullish Trend; Close Below 70 to Trigger Correction
  • Interim Resistance: 1.6000 Pivot to 1.6050 (78.6% Fibonacci retracement)
  • Former Resistance Around 1.5680-90 (38.2% Fib retracement) to Act as New Support

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)

JUL 2013

08/13/2013 8:30 GMT

2.8%

2.8%

+37

+13

July 2013 U.K. Consumer Price Index

Forex_Trading_U.K._CPI-_British_Pound_at_Risk_for_Larger_Correction_body_ScreenShot112.png, Trading U.K. CPI- British Pound at Risk for Larger Correction

The headline reading for U.K. inflation narrowed 2.8% in July from 2.9% the month prior, while core consumer price growth slipped to 2.0% amid forecasts for a 2.2% print. Despite the slower rate of price growth, the in-line print propped up the British Pound, with the GBPUSD climbing above the 1.5475 region, but we saw the sterling consolidate during the day as the pair closed at 1.5446.

--- 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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