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GBP/USD to Mount Larger 2015 Gains on Strong U.K. CPI

GBP/USD to Mount Larger 2015 Gains on Strong U.K. CPI

2015-06-16 04:00:00
David Song, Shuyang Ren,
Share:

- Headline U.K. Consumer Price Index (CPI) to Rise for Second Time in 2015.

- Core Rate of Inflation to Pick Up for First Time Since December 2014.

Trading the News: U.K. Consumer Price Index

An uptick in the headline & core U.K. Consumer Price Index (CPI) may spur fresh monthly highs in GBP/USD as it raises the Bank of England’s (BoE) scope to remove the record-low interest rate sooner rather than later.

What’s Expected:

GBP/USD U.K. CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

BoE Governor Mark Carney may sound increasingly hawkish over the coming months as the central bank head anticipates stronger price growth in the second-half of 2015, and we may see a growing number of Monetary Policy Committee (MPC) officials prepare U.K. households & businesses for higher borrowing-costs as the economy gets on a firmer footing.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (APR)

1.0B

1.2B

Retail Sales inc. Auto Fuel (APR)

0.4%

1.2%

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

2.1%

2.2%

U.K. firms may boost consumer prices amid stronger wage growth along with the expansion in private-sector credit, and a strong inflation report may instill a more bullish outlook for the sterling as the BoE remains on course to normalize monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

BRC Shop Price Index (YoY) (MAY)

-1.8%

-1.9%

GfK Consumer Confidence (MAY)

4

1

Producer Price Index n.s.a. (YoY) (APR)

-1.6%

-1.7%

However, waning confidence paired with falling input costs may continue to drag on price growth, and a dismal CPI print may undermine the near-term breakout in GBP/USD as market participants push back bets for a BoE rate hike.

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Headline & Core Inflation Upticks in May

  • 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 Fall Short of Market Forecast

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

Read More:

EUR/USD Unfazed by Dovish ECB- Retail FX Remains Net-Short

Scalp Webinar: Bearish USD Technical Outlook to Face Upbeat FOMC

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD may continue to retrace the decline from May as it breaks out of the triangle/wedge formation carried over from the previous month, with the pair showing a net 2015-gain for the first time since May 22.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd has flipped net-short GBP/USD coming into the third-week of June, with the ratio currently holding at -1.00.
  • Interim Resistance: 1.5780 (38.2% retracement) to 1.5814 (May high)
  • Interim Support: 1.5400 handle to 1.5420 (78.6% expansion)

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)

APR 2015

05/19/2015 08:30 GMT

1.0%

0.8%

-43

-62

April 2015 U.K. Core Consumer Price Index

GBP/USD Chart

The U.K. Consumer Price Index (CPI) contracted for the first time since 1960 as price growth slipped an annualized 0.1% in April, while the core rate of inflation slowed to a 9-year low of 0.8% after expanding 1.0% the month prior. The low-inflationary environment runs the risk of seeing a further delay in the Bank of England’s (BoE), but it seems as though the central bank will largely stay on course to normalize monetary policy over the near to medium-term as the board anticipates a stronger recovery later this year. The initial market reaction was limited and short lived, with GBP/USD dipping below 1.5550 to end the day at 1.5510.

--- 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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