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Bullish GBP/USD Outlook to Gather Pace on Faster U.K. Inflation

Bullish GBP/USD Outlook to Gather Pace on Faster U.K. Inflation

David Song, Strategist

- U.K. Consumer Price Index (CPI) to Increase for First Time in 2014.

- Core Inflation to Rise 1.8%- Fastest Rate of Growth Since November.

Trading the News: U.K. Consumer Price Index

A marked rebound in the U.K.’s Consumer Price Index (CPI) may pave the way for fresh highs in the GBP/USD as it puts increased pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.

What’s Expected:

GBP/USD CPI

Why Is This Event Important:

Indeed, the BoE Minutes may reveal a growing dissent within the Monetary Policy Committee (MPC) as U.K. officials anticipate a stronger recovery in 2014, and heightening price pressures may boost the bullish sentiment surrounding the British Pound as it spurs a more material shift in the policy outlook.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (MAR)

0.6B

1.1B

GfK Consumer Confidence (APR)

-4

-3

Retail Sales inc. Auto (MoM) (MAR)

-0.4%

0.1%

The ongoing pickup in household sentiment along with the resilience in retail sales may push U.K. firms to ramp up consumer prices, and a sharp uptick in the headline reading for inflation should foster a bullish reaction in the GBP/USD as it fuels interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Jobless Claims Change (APR)

-30.0K

-25.1K

BRC Shop Price Index (YoY) (APR)

-0.8%

-1.4%

Mortgage Approvals (MAR)

72.0K

67.1K

Nevertheless, efforts to cool the house paired with the persistent slack in the real economy may continue to dampen the outlook for price growth, and a dismal CPI print may generate a larger correction in the GBP/USD as market participants scale back bets of seeing higher borrowing costs ahead of schedule.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. CPI Climbs 1.7% or Higher

  • Need green, five-minute candle following the release to consider a long British Pound trade
  • If market reaction favors buying sterling, go long GBP/USD with two separate position
  • Set stop at the near-by swing low/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

Bearish GBP Trade: Headline Reading for Inflation Disappoints

  • Need red, five-minute candle to favor a short GBP/USD trade
  • Implement same setup as the bullish British Pound trade, just in opposite direction

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily

Chart - Created Using FXCM Marketscope 2.0

  • Retains Ascending Channel from 2013- Higher Low in Place?
  • Interim Resistance: 1.7000 Pivot to 1.7030 (100.0% expansion)
  • Interim Support: 1.6730 (61.8% expansion) to 1.6720 (50.0% retracement)

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)

MAR 2014

04/15/2014 8:30 GMT

1.6%

1.6%

+69

+65

March 2014 U.K. Consumer Price Index

GBP/USD Chart

U.K. consumer prices increased an annualized 1.6% in March after expanding 1.7% the month prior, while the core rate of inflation grew 1.6% during the same period to match the slowest pace of growth for 2014. Despite the slowdown, the in-line CPI prints pushed the GBP/USD back above the 1.7000, with the pair ending the day at 1.6723.

--- 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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