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GBP/USD at Risk for Larger Pullback on Slowing U.K. Inflation

GBP/USD at Risk for Larger Pullback on Slowing U.K. Inflation

David Song, Gregory Marks,

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

- Core Inflation Unexpectedly Held Steady at 1.7% in February.

Trading the News: U.K. Consumer Price Index

Slowing inflation in the U.K. may spur a larger correction in the GBP/USD as it allows the Bank of England (BoE) to retain its highly accommodative policy stance for an extended period of time.

What’s Expected:

GBP/USD volatiltiy on Bank of England BoE CPI

Why Is This Event Important:

The BoE may further delay its exit strategy in an effort to address the ongoing slack in the U.K. economy, but Governor Mark Carney may show a greater willingness to normalize monetary policy sooner rather than later as the central bank anticipates a stronger recovery in 2014.

Join DailyFX on Demand to Cover Current British Pound Trade Setups

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (FEB)

0.7B

0.6B

BRC Shop Price Index (YoY) (MAR)

-1.5%

-1.7%

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

0.7%

0.5%

Easing input prices paired with the slowdown in private sector credit may prompt businesses to offer discounted prices to U.K. households, and a weaker-than-expected inflation print may generate a larger pullback in the GBP/USD as it raises the BoE’s scope to retain its highly accommodative policy stance for an extended period of time.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

GfK Consumer Confidence (MAR)

-6

-5

Retail Sales ex Auto (MoM) (FEB)

0.1%

1.8%

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

1.2%

1.3%

Nevertheless, the resilience in household consumption along with the pickup in wage may encourage U.K. firms to raise consumer prices, and a stronger-than-expected CPI print may heighten the bullish sentiment surrounding the British Pound as it fuels interest rate expectations.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. CPI Slows to 1.6% or Lower

  • Need red, five-minute candle following the release to consider a short British Pound trade
  • If market reaction favors selling sterling, 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 U.K. Inflation Exceeds Market Expectations

  • 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

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Failure to Push Above February High (1.6821) Raises Risk for Double-Top Formation
  • Bullish RSI Momentum Continues to Favor Series of Higher Highs & Higher Lows
  • 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)

FEB 2014

03/25/2014 9:30 GMT

0.5%

0.5%

+17

+45

February 2014 U.K. Consumer Price Index

GBPUSD Chart

The YoY figure for U.K. CPI came in at 1.7% as expected and the MoM figure at 0.5%. The Pound saw a move to the upside that was quickly retraced, but the GBPUSD pair ended the day up 45 pips from the release. As for insight into this print, if we do see CPI come in under market expectation it is likely that we may see GBP weakness. This may be especially pronounced in the context of a possible double top and resurgence of USD strength post-Retail Sales that came in better than expected on Monday morning in NY.

--- Written by David Song, Currency Analyst and Gregory Marks

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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