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Bullish GBP/USD Outlook at Risk on Slow U.K. CPI- 1.6400 in Focus

Bullish GBP/USD Outlook at Risk on Slow U.K. CPI- 1.6400 in Focus

2014-03-25 04:00:00
David Song, Strategist
GBP/USD Outlook as UK CPI Data Released

- U.K. Consumer Price Index (CPI) to Narrow for Fifth Consecutive Month.

- Core Inflation to Hold Steady at 1.6%- Lowest Reading Since November 2009.

Trading the News: U.K. Consumer Price Index

A further slowdown in U.K. inflation may generate a further decline in the GBP/USD as it limits the Bank of England’s (BoE) scope to normalize monetary policy sooner rather than later.

UK CPI GBP Economic Calendar Events

Click Here for the Entire DailyFX Economic Calendar

Why Is This Event Important:

Indeed, the upcoming shuffle in the Monetary Policy Committee (MPC) may spark a material shift in the policy outlook as the central bank continues to assess the underlying slack in the real economy, but it seems as though Governor Mark Carney will do little to halt the appreciation in the British Pound as it helps to balance the risks surrounding the region.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

BRC Shop Price Index (YoY) (FEB)

-1.1%

-1.4%

Private Consumption (QoQ) (4Q P)

0.6%

0.4%

Retail Sales ex Auto (MoM) (JAN)

-1.2%

-1.5%

U.K. Consumer Prices may weaken further in February amid the slowdown in private consumption, and a dismal inflation print may threaten the bullish sentiment surrounding the sterling as it weighs on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Average Weekly Earnings ex Bonus (3MoY) (JAN)

1.2%

1.3%

Halifax House Prices (3MoY) (FEB)

7.3%

7.9%

Producer Price Index- Output n.s.a. (YoY) (JAN)

0.7%

0.9%

Nevertheless, higher home prices paired with the uptick in wage growth may limit the risk of seeing a material slowdown in U.K. inflation, and a better-than-expected CPI print may spur a near-term rebound in the GBP/USD as the pair continues to carve a series of higher highs & higher lows.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. CPI Narrows to 1.7% or Lower

  • Need red, five-minute candle following the release to consider a short British Pound trade.
  • If market reaction favors selling sterling, short GBP/USD with two separate positions.
  • 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 Inflation Tops Market Forecast

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

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Watching 1.6400 for Lower High; Break Below Would Negative Bullish Bias.
  • Bearish Relative Strength Index Highlights Downside Targets.
  • Interim Resistance: 1.6850-60 (78.6% expansion).
  • Interim Support: 1.6400 (61.8% expansion) to 1.6430 (23.6% expansion).

Impact that the U.K. CPI report has had on GBP during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 2014

02/18/2014 9:30 GMT

2.0%

1.9%

+3

-2

January 2014 U.K. Consumer Price Index

UK CPI Chart

U.K. Consumer Prices grew an annualized 1.9% in January to mark the slowest pace of growth since November 2009, with the core rate of inflation narrowing to 1.6% from 1.7% the month prior. The initial reaction to the weaker-than-expected print was short-lived as the GBP/USD climbed back above the 1.6700 handle, but the sterling struggled to hold its ground during the North American trade as the pair closed at 1.6680.

--- 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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