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British Pound to Threaten Key Support on Slowing UK Inflation

British Pound to Threaten Key Support on Slowing UK Inflation

David Song, Strategist

- U.K. Consumer Price Index(CPI)to Narrow to 2.5%- Lowest Since April

- Core Inflation to Slow for First Time Since July

Trading the News: U.K. Consumer Price Index

The headline reading for U.K. inflation is expected to narrow to an annualized 2.5% in October, and a marked slowdown may spur a more meaningful correction in the British Pound as it limits the Bank of England’s (BoE) scope to implement its exit strategy ahead of schedule.

What’s Expected:

Time of release: 11/12/2013 9:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: 2.5%

Previous: 2.7%

DailyFX Forecast: 2.7% to 2.9%

Why Is This Event Important:

The recent trend of better-than-expected data may continue to prompt sticky price growth in the U.K., and we may see the BoE switch gears in 2014 as the central bank continues to see above-target inflation over the policy horizon.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (QoQ) (3Q A)

0.8%

0.8%

Retail Sales ex Auto (MoM) (SEP)

0.3%

0.7%

Jobless Claims Change (SEP)

-25.0K

-41.7K

The stronger recovery may heighten price pressures in the U.K. as the BoE retains its highly accommodative policy stance, and the threat of an asset-bubble may push the central bank to move away from its easing cycle as the economy gets on a more sustainable path.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Trade Balance (SEP)

-2.700B

-3.268B

BRC Shop Price Index (YoY) (OCT)

0.1%

-0.5%

CBI Trends Selling Prices (OCT)

4

-2

However, easing input costs along with the appreciation in the British Pound may continue to limit the upside for inflation, and a marked slowdown in the CPI may trigger a more meaningful correction in the GBPUSD as it provides the BoE with more room to retain its highly accommodative policy stance.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. CPI Narrows to 2.5% or Lower

  • Need red, five-minute candle following the print to consider a short British Pound trade
  • If 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: Inflation Tops Market Expectations

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

Potential Price Targets For The Release

GBPUSD Daily

Forex_British_Pound_to_Threaten_Key_Support_on_Slowing_UK_Inflation_body_Picture_2.png, British Pound to Threaten Key Support on Slowing UK Inflation

Chart - Created Using FXCM Marketscope 2.0

  • Retains Range-Bound Price Action From September
  • Relative Strength Index Preserves Bearish Momentum
  • Interim Resistance: 1.6250 Pivot to 1.6300 Pivot (2012 highs)
  • Interim Support: 1.5900 Pivot to 1.5910 (78.6% Fibonacci expansion)

Impact that the U.K. CPI 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)

SEP 2013

10/15/2013 8:30 GMT

2.6%

2.7%

-53

+6

September 2013 U.K. Consumer Price Index

Forex_British_Pound_to_Threaten_Key_Support_on_Slowing_UK_Inflation_body_ScreenShot362.png, British Pound to Threaten Key Support on Slowing UK Inflation

U.K. consumer prices increased 2.7% for the second consecutive month in September, while the core rate of inflation unexpectedly advanced 2.2% during the same period amid forecasts for a 2.0% clip. Despite the stronger-than-expected print, the British Pound struggled to maintain the initial bounce following the print, with the GBPUSD slipping below the 1.5950 region, but the sterling regained its footing to end the day at 1.5995.

--- 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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