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GBP/USD Vulnerable to Slowing U.K. CPI- 1.4700 Support in Focus

GBP/USD Vulnerable to Slowing U.K. CPI- 1.4700 Support in Focus

David Song, Shuyang Ren,

- U.K. Consumer Price Index (CPI) to Slip to Record-Low of 0.1%.

- Core Rate of Inflation to Slow to Annualized 1.3%- Lowest Since December 2014.

Trading the News: U.K. Consumer Price Index

A further slowdown in the headline and core U.K. Consumer Price Index (CPI) may trigger a test of the monthly low (1.4633) in GBP/USD as the Bank of England (BoE) further delays its normalization cycle.

What’s Expected:

GBP/USD U.K. CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

The BoE may continue to endorse a wait-and-see approach as the central bank anticipates to achieve the 2% inflation target over the next two-years, and the ongoing weakness in price growth may produce near-term headwinds for the British Pound as the central bank remains in no rush to raise the benchmark interest rate.

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Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Average Weekly Earnings ex Bonus (3MoY) (JAN)

1.8%

1.6%

Private Consumption (QoQ) (4Q P)

0.8%

0.5%

Retail Sales ex Auto (MoM) (JAN)

-0.3%

-0.7%

The ongoing weakness in household earnings paired with the slowdown in household spending may push U.K. firms to further discount consumer prices, and a marked slowdown in the headline and core figure may spark a near-term selloff in GBP/USD as market participants scale back bets for a BoE rate hike in 2015.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

RICS House Price Balance (FEB)

6%

14%

Index of Services (MoM) (DEC)

0.4%

0.6%

CBI Trends Selling Prices (FEB)

-7

8

However, sticky home prices paired with the expansion in service-based activity may help to offset the impact of falling energy prices, and a better-than-forecast CPI print may generate a more meaningful rebound in the pound-dollar as it boosts interest rate expectations.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Headline & Core Inflation Tick Lower in February

  • 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 Beats Market Expectations

  • 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-Record Small Trader Short Position in Canadian Dollar

EUR/USD Clears Bearish RSI Momentum- GBP to Face Slowing UK Inflation

Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the range-bound prices action in GBP/USD, will keep a close eye on the Relative Strength Index (RSI) as it appears to be carving a bullish trend.
  • Interim Resistance: 1.5000 pivot to 1.5015 (50% expansion)
  • Interim Support: 1.4700 pivot to 1.4710 (78.6% 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)

JAN 2015

02/17/2015 9:30 GMT

0.4%

0.3%

+55

+20

January 2015 U.K. Consumer Price Index

GBP/USD Chart

The U.K. Consumer Price Index (CPI) slowed more than expected, with the headline reading slipping to an annualized rate of 0.3% in January from 0.5% the month prior on the back of falling food and energy prices. Nevertheless, the core rate of inflation rose to 1.4% from 1.3% during the same period. Indeed, the ongoing weakness in headline inflation may prompt the Bank of England (BoE) to further delay its normalization cycle, but we may see Governor Mark Carney continue to prepare U.K. households and businesses for higher borrowing-costs amid the stickiness in core prices. The initial market reaction to the prints was short-lived as GBP/USD pulled back from the 1.5400 handle to end the day at 1.5356.

--- 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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