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GBP/USD to Face Near-Term Rebound on Strong U.K. Core CPI

GBP/USD to Face Near-Term Rebound on Strong U.K. Core CPI

David Song, Shuyang Ren,

- U.K. Consumer Price Index (CPI) to Hold at Annualized 1.2% for Second-Month.

- Core Rate of Inflation to Rebound from Lowest Reading Since 2009.

Trading the News: U.K. Consumer Price Index

Beyond the headline reading for U.K. inflation, an uptick in the core Consumer Price Index (CPI) may generate a near-term rebound in GBP/USD as the Bank of England (BoE) largely remains on course to normalize monetary policy in 2015.

What’s Expected:

GBP/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Despite the downward revision to the BoE’s growth & inflation forecast, sticky price growth in the U.K. may spur a greater dissent within the Monetary Policy Committee (MPC), and it seems as though Governor Mark Carney will continue to prepare household & businesses for higher borrowing-costs as the economic recovery becomes more broad-based.

For more updates, sign up for David's e-mail distribution list.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Manufacturing Production (MoM) (SEP)

0.3%

0.4%

Jobless Claims Change (OCT)

-20.0K

-20.4K

Average Weekly Earnings ex Bonus (3MoY) SEP)

1.1%

1.3%

Higher wage growth paired with the pickup in business outputs may generate a stronger-than-expected CPI print, and stick price pressures should help to improve the appeal of the sterling as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

GfK Consumer Confidence (OCT)

-1

-2

Retail Sales ex Auto (MoM) (SEP)

0.0%

-0.3%

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

-0.3%

-0.4%

However, U.K. firms may continue to offer discounted prices amid falling input prices along with the slowdown in private-sector consumption, and a dismal inflation report may spur fresh monthly lows in GBP/USD as the Federal Reserve shows a greater willingness to normalize monetary policy in the year ahead.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Core Inflation Rebounds in October

  • 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

Bearish GBP Trade: CPI Report Falls Short of 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

Read More:

COT: US Dollar Positioning Little Changed Despite New Price High

Price & Time: EUR/USD Fails At Key Gann Resistance

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD remains vulnerable to further losses as the RSI appears to be sliding back into oversold territory.
  • Interim Resistance: 1.6000 (50.0% retracement) to 1.6020 pivot
  • Interim Support: 1.5540 (61.8% expansion) to 1.5550 (78.6% retracement)

Join DailyFX on Demandfor Real-Time Updates on the DailyFX Speculative Sentiment Index!

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)

SEP 2014

10/14/2014 8:30 GMT

1.4%

1.2%

-49

-108

September 2014 U.K. Consumer Price Index

GBP/USD Chart

The U.K.’s Consumer Price Index (CPI) unexpectedly slipped to a five-year low of 1.2% in September, with the core rate of inflation also narrowing to an annualized 1.5% from 1.9% in August. Indeed, teasing price pressures may encourage the Bank of England (BoE) to retain its current policy throughout the remainder of the year, but it seems as though the central bank will stay on course to raise the benchmark interest rate in 2015 as Governor Mark Carney sees a sustainable recovery in the U.K. The sterling lost ground against its major counterparts following the release, with GBP/USD dipping back below the 1.6000 handle to end the day at 1.5907.

--- 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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