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GBP/USD Rebound at Risk on Slowing U.K. Consumer Price Index (CPI)

GBP/USD Rebound at Risk on Slowing U.K. Consumer Price Index (CPI)

David Song, Shuyang Ren,

- Headline U.K. Consumer Price Index (CPI) to Hold Flat for Third Time in 2015.

- Core Rate of Inflation to Expand Annualized 0.9% for Second Consecutive Month.

Trading the News: U.K. Consumer Price Index

A further slowdown in the U.K. Consumer Price Index (CPI) may generate a near-term pullback in GBP/USD as it puts increased pressure on the Bank of England (BoE) to retain its current policy throughout 2015.

What’s Expected:

GBP/USD UK CPI

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Why Is This Event Important:

However, the stickiness in the core rate of inflation may limit the downside risk for the sterling as BoE Governor Mark Carney anticipates faster price growth in the second-half of the year, and the central bank head may continue to prepare U.K. households and businesses for higher borrowing-costs should the fundamental developments show signs of a stronger recovery.

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Expectations: Bearish Argument/Scenario

ReleaseExpectedActual
Net Consumer Credit (MAY)1.1B1.0B
CBI Trends Selling Price (JUN)---7
Producer Price Index- Output n.s.a. (YoY) (MAY)-1.6%-1.6%

Lower input costs paired with the slowdown in private-sector credit may encourage U.K. firms to offer discounted prices, and a weak CPI figure may dampen the appeal of the British Pound as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

ReleaseExpectedActual
GfK Consumer Confidence (JUN)27
Retail Sales inc. Auto Fuel (MoM) (MAY)-0.1%0.2%
Average Weekly Earnings ex. Bonus (3MoY) (APR)2.5%2.7%

Nevertheless, improved confidence along with resilience in household consumption may prompt a strong inflation print, and a positive development may pave the way for a near-term advance in GBP/USD as the BoE remains on course to normalize monetary policy.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Headline & Core CPI Highlight Slower Price Growth

  • Need red, five-minute candle following the release to consider a short British Pound trade.
  • If market reaction favors bearish sterling trade, 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: U.K. Inflation Exceeds 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:

USD/JPY Threatens Bearish Formation as Greek Deal Fuels Risk Appetite

The Weekly Volume Report: High Turnover Euro Capitulation

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Waiting for a break of the downward trend from June to instill a more bullish outlook for GBP/USD as the RSI fails to retain the bearish momentum.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since the beginning of July, with the ratio holding near extremes as it sits at +1.46.
  • Interim Resistance: 1.5630 (38.2% retracement) to 1.5650 (38.2% expansion).
  • Interim Support: 1.5330 (78.6% retracement) to 1.5350 (50% retracement).

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

PeriodData ReleasedEstimateActualPips ChangePips Change
MAY 201506/16/2015 08:30 GMT1.0%0.9%-14+62

May 2015 U.K. Core Consumer Price Index

GBP/USD Chart

The U.K. Consumer Price Index (CPI) climbed an annualized 0.1% in May after contracting for the first time since 1960, while the core rate of inflation climbed to 0.9% from 0.8% the month prior to mark the first advance since January. Even though the Bank of England (BoE) remains on course to normalize monetary policy, subdued price growth may encourage the central bank to retain its wait-and-see approach throughout 2015, and the British Pound may face further headwinds over the near to medium-term as the committee remains unanimous in preserving its current policy stance. GBP/USD slipped below the 1.5500 following the mixed CPI print, but the pound-dollar regained its footing during the North American trade to end the day at 1.5646.

--- 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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