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GBP/USD to Carve Lower-Low on Slowing U.K. CPI; 1.5900 in Focus

GBP/USD to Carve Lower-Low on Slowing U.K. CPI; 1.5900 in Focus

David Song, Shuyang Ren,

- U.K. Consumer Price Index (CPI) of 1.4% Would Mark Lowest Reading Since 2009.

- Core Rate of Inflation to Downtick for The Fourth Time This Year.

Trading the News: U.K. Consumer Price Index

A further slowdown in the U.K.’s Consumer Price Index (CPI) may bring up fresh monthly lows in the GBP/USD as it gives the Bank of England (BoE) greater scope to retain its highly accommodative policy stance for an extended period of time.

What’s Expected:

GBP/USD CPI

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Why Is This Event Important:

Subdued price growth in the U.K. may continue to foster a 7-2 split within the Monetary Policy Committee (MPC), and a weak CPI print may drag on interest rate expectations as Governor Mark Carney remains in no rush to normalize policy.

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Expectations: Bearish Argument/Scenario

Release

Expected

Actual

RICS House Price Balance (SEP)

36%

30%

BRC Shop Price Index (YoY) (SEP)

--

-1.8%

Producer Price Index- Input n.s.a. (YoY) (AUG)

-6.8%

-7.2%

Easing home prices paired with lower input costs may generated a dismal inflation print, and a marked slowdown may spark a more meaningful run at the 1.5900 handle as the GBP/USD retains the bearish momentum from July.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (QoQ) (2Q F)

0.8%

0.9%

Retail Sales inc. Auto (MoM) (AUG)

0.4%

0.4%

Average Weekly Earnings in Bonus (3MoY) (JUL)

0.5%

0.6%

However, the uptick in wage growth along with the resilience in private-sector consumption may generate a strong CPI figure, and an unexpected pickup should generate a larger rebound in the pound-dollar as it renews bets for higher borrowing costs in the U.K.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Headline & Core Inflation Weakens in September

  • 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: CPI Report Tops Market Forecasts

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

Read More:

COT: British Pound Speculators Flip to Net Short Position

Price & Time: Do or Die Levels For Risk?

Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • String of lower-highs continue to favor the downside, especially with the longer-dating bearish RSI momentum in play
  • Interim Resistance: 1.6280 (38.2% retracement) to 1.6300 (50.0% retracement)
  • Interim Support: 1.5890 (61.8% retracement) to 1.5900 (50.0% expansion)

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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)

AUG 2014

09/16/2014 8:30 GMT

1.5%

1.5%

+12

+108

August 2014 U.K. Consumer Price Index

GBP/USD Chart

The U.K.’s Consumer Price Index (CPI) slowed as expected to an annualized 1.5% in August from 1.6% the month prior. However, the core rate of inflation beat market forecasts as the reading unexpectedly advanced to 1.9% from 1.8% in July. Easing price pressures was mainly seen in food and non-alcoholic drinks, which marked the largest decline in more than a decade. Subdued inflation increases the probability that the Bank of England (BoE) will retain its current policy throughout 2014, but we may see a growing rift within the central bank amid the stickiness in the core CPI. The sterling showed a choppy reaction following the mixed print, but the GBP/USD firmed up during the North American trade to end the day at 1.6275.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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