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GBP/USD Risks Larger Rebound on Sticky U.K. Core CPI- 1.55 in Focus

GBP/USD Risks Larger Rebound on Sticky U.K. Core CPI- 1.55 in Focus

David Song, Shuyang Ren,

- U.K. Consumer Price Index (CPI) to Slow for Sixth Consecutive Month.

- Headline Reading of 0.7% Would Mark Lowest Print Since 2002.

Trading the News: U.K. Consumer Price Index

The U.K. Consumer Price Index (CPI) may spark a bearish reaction in GBP/USD as easing price pressures dampen the Bank of England’s (BoE) scope to normalize monetary in 2015.

What’s Expected:

GBP/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

However, an uptick in the core rate of inflation heighten the appeal of the British Pound and produce a larger rebound in GBP/USD as BoE Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs.

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Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Construction Output s.a. (MoM) (NOV)

1.2%

-2.0%

Markit Purchasing Manager Index Construction (DEC)

59.0

57.6

GfK Consumer Confidence (DEC)

-1

-4

Falling energy prices along with the slowdown in building activity may generate a dismal U.K. CPI print, and the sterling may face additional headwinds over the near-term should the report drag on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto (MoM) (NOV)

0.3%

1.7%

Jobless Claims Change (NOV)

-20.0K

-26.9K

Average Weekly Earnings inc. Bonus (3MoY) (OCT)

1.2%

1.4%

However, U.K. firms may boost consumer prices amid the ongoing improvement in the labor market paired with the pickup in wage growth, and the stickiness in the core rate of inflation may encourage the BoE to adopt a more hawkish tone for monetary policy as the central bank anticipates a stronger recovery in 2015.

How To Trade This Event Risk(Video)

Bearish 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.

Bullish 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:

Price & Time: EUR/JPY Rebounds Off Key Convergence

COT: USD Records in Commercial Shorts, Spec Longs, and Open Interest

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Looking for lower-high in GBP/USD as Relative Strength Index (RSI) comes off of oversold territory & highlights risk of larger rebound, with former support regions in focus.
  • Interim Resistance: 1.5500 pivot to 1.5520 (38.2% expansion)
  • Interim Support: 1.5000 pivot to 1.5030 (23.6% 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)

NOV 2014

12/16/2014 9:30 GMT

1.2%

1.0%

+45

+80

November 2014 U.K. Consumer Price Index

GBP/USD Chart

The U.K. Consumer Price Index (CPI) weakened to a 12-year low of 1.0% in November from 1.3% the month prior, while the core inflation rate also diminished to 1.2% during the same period to mark the slowest pace of growth since 2008. Easing price pressures may push the Bank of England (BoE) to further delay the first rate hike as price growth continues to undershoot the 2% target, but Governor Mark Carney may keep the door open to normalize monetary policy in 2015 as the central bank anticipates a stronger recovery in the year ahead. Despite the dismal prints, the bearish reaction in the British Pound was short-lived, with GBP/USD climbing back above the 1.5700 handle to close at 1.5724.

--- 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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