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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

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

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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

ReleaseExpectedActual
Net Consumer Credit (APR)1.0B1.2B
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

ReleaseExpectedActual
BRC Shop Price Index (YoY) (MAY)-1.8%-1.9%
GfK Consumer Confidence (MAY)41
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)

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Impact that the U.K. Core CPI report has had on GBP during the last release

PeriodData ReleasedEstimateActualPips ChangePips Change
APR 201505/19/2015 08:30 GMT1.0%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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