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GBP/USD Risks Larger Pullback on Dismal UK Consumer Price Index (CPI)

GBP/USD Risks Larger Pullback on Dismal UK Consumer Price Index (CPI)

David Song, Strategist

- U.K. Consumer Price Index (CPI) to Slow for Fourth Time in 2014.

- Core Inflation to Fall Back From 2.0%- Marked Fastest Rate of Growth Since September.

Trading the News: U.K. Consumer Price Index

A marked slowdown in the U.K.’s Consumer Price Index (CPI) may generate a larger pullback in the GBP/USD as it limits Bank of England (BoE) scope to normalize monetary policy sooner rather than later.

What’s Expected:

GBP/USD UK CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Nevertheless, the BoE Minutes due out later this week may reveal a growing dissent within the Monetary Policy Committee (MPC) as U.K. officials see a stronger recovery in 2014, and the market reaction to the U.K. CPI print could be short-lived should we see a growing number of central bank officials adopt a more hawkish tone for monetary policy.

For Real-Time Updates and Potential Trade Setups on the British Pound, sign up for DailyFX on Demand

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

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

1.2%

0.7%

Net Consumer Credit (APR)

0.8B

0.7B

CBI Trends Selling Prices (MAY)

10

4

U.K. firms may offer discounted prices amid weak wage growth paired with the slowdown in private sector credit, and a weak inflation print may undermine the near-term outlook for the GBP/USD as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Jobless Claims Change (MAY)

-25.0K

-27.4K

Private Consumption (QoQ) (1Q P)

0.6%

0.8%

Retail Sales inc. Auto (MoM) (MAR)

0.4%

1.3%

Nevertheless, the resilience in private sector consumption along with the ongoing improvement in the labor market may limit the downside risk for price growth, and a stronger-than-expected CPI print may heighten the bullish sentiment surrounding the sterling as it fuels bets for a rate hike.

Read More:

Top Event Risk This Week: FOMC, RBA and BOE Minutes, Canada CPI

COT: Euro Speculators are Now Most Short Since Last June

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. CPI Slips 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 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 Reading for Inflation Exceeds 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 reverse

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Carves Series of Higher-Lows in June; Higher-High in Place?
  • Interim Resistance: 1.7000 Pivot to 1.7030 (100.0% expansion)
  • Interim Support: 1.6720 (61.8% expansion) to 1.6730 (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)

APR 2014

05/20/2014 8:30 GMT

1.7%

1.8%

-23

-15

April 2014 U.K. Consumer Price Index

GBP/USD Chart

U.K. consumer prices increased an annualized 1.8% in April after expanding 1.6% the month prior, while the core rate of inflation climbed 2.0% to mark the fastest pace of growth since September. Despite the stronger-than-expected CPI print, the GBP/USD slipped below the 1.6825 region following the release, but the British Pound pared the decline during the North American trade to close at 1.6836.

--- 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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