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GBP/USD Pullback to Fizzle to Sticky UK CPI- Topside Targets in Focus

GBP/USD Pullback to Fizzle to Sticky UK CPI- Topside Targets in Focus

2015-05-19 04:00:00
David Song, Shuyang Ren,
Share:

- Headline U.K. Consumer Price Index (CPI) to Hold Flat for Third-Consecutive Month.

- Core Rate of Inflation to Hold at Annualized 1.0%- Slowest Pace of Growth Since July 2006.

Trading the News: U.K. Consumer Price Index

The headline & core reading for the U.K. Consumer Price Index (CPI) may spur a near-term rebound in GBP/USD should the report highlight an improved outlook for price growth.

What’s Expected:

GBP/USD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Despite the downward revision for growth, the uptick in the Bank of England’s (BoE) inflation forecast may foreshadow a better-than-expected CPI print, and the diminish risk for deflation may spur a growing dissent within the committee as Governor Mark Carney pledges to look through the transitory/seasonal factors dragging on the real economy.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

2.1%

2.2%

Net Consumer Credit (MAR)

0.8B

1.2B

Purchasing Manager Index- Services (APR)

58.5

59.5

U.K. firms may boost consumer prices amid stronger wage growth paired with the uptick in private-sector credit- and a strong inflation print may open up the topside targets for GBP/USD as the BoE remains on course to normalize monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (1Q A)

2.6%

2.4%

CBI Business Optimism (APR)

19

3

Retail Sales inc. Auto Fuel (MoM) (MAR)

0.4%

-0.5%

However, narrowing confidence along with slowing sales may generate a dismal CPI report, and the ongoing slack in the real economy may dampen the appeal of the British Pound and encourage the BoE to further delay normalization cycle.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Headline & Core Inflation Holds/Upticks in April

  • Need green, five-minute candle following the release to consider a long British Pound trade.
  • If market reaction favors bullish sterling trade, long GBP/USD with two separate position.
  • Set stop at the near-by swing low/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: Consumer Prices Disappoint & Raises Risk for Deflation

  • Need red, five-minute candle to favor a short GBP/USD trade.
  • Implement same setup as the bullish British Pound trade, just in reverse.

Read More:

GBP/USD Rally to Benefit from Sticky UK CPI, Rebound in Retail Sales

Price & Time: The Curious Case of USD/JPY

Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD remains at risk for a near-term pullback as the RSI falls back from overbought territory, but will stay constructive on the pair as price & oscillator retains the bullish formation carried over from the previous month.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short GBP/USD since May 11, with the ratio currently sitting at -1.06.
  • Interim Resistance: 1.5780 (38.2% retracement) to 1.5814 (May high)
  • Interim Support: 1.5550 (61.8% expansion) 1.5570 (38.2% retracement)

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

Impact that the U.K. Core 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)

MAR 2015

04/14/2015 08:30 GMT

1.2%

1.0%

-25

+96

March 2015 U.K. Core Consumer Price Index

GBP/USD Chart

The U.K. Consumer Price Index (CPI) remained flat in March, while the core rate of inflation unexpectedly slipped to an annualized 1.0% from 1.2% the month prior to mark a 9-year low. A deeper look at the report showed discounted prices in clothing and footwear were largely offset by a rebound in energy costs. Despite the weak CPI print, the Bank of England (BoE) looks poised to retain its hawkish forward-guidance for monetary policy as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs. The bearish market reaction in GBP/USD was short-lived, with GBP/USD climbing back above the 1.4800 handle during the North American trade to end the day at 1.4751.

--- 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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