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GBP/USD Risks Near-Term Breakout on Strong U.K. Core CPI

GBP/USD Risks Near-Term Breakout on Strong U.K. Core CPI

2015-08-18 04:00:00
David Song, Shuyang Ren,
Share:

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

- Core Rate of Inflation to Uptick to Annualized 0.9% From the Lowest Level Since March 2001.

Trading the News: U.K. Consumer Price Index

Even though the headline reading for the U.K. Consumer Price Index (CPI) is expected to hold flat for the second consecutive month, an uptick in the core rate of inflation may spur a near-term breakout in GBP/USD as its puts increased pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.

What’s Expected:

GBP/USD UK CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of strong price growth may encourage a greater dissent within the Monetary Policy Committee (MPC) following the 8-1 split at the August 6 interest rate decision, and the BoE may continue to prepare U.K. households and businesses for higher borrowing-costs as Governor Mark Carney pledges to achieve the 2% inflation target over the policy horizon.

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Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

2.8%

2.8%

Net Consumer Credit (JUN)

1.1B

0.7%

CBI Business Optimism (JUL)

1

8

Stronger wage growth paired with the pickup in private-sector credit may boost consumer prices, and a strong CPI print may heighten the bullish sentiment surrounding the British Pound as it fuels speculation for higher borrowing-costs in the U.K.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

BRC Shop Price Index (YoY) (JUL)

--

-1.4%

Retail Sales ex Auto Fuel (MoM) (JUN)

0.4%

-0.2%

Producer Price Index- Input n.s.a. (YoY) (JUN)

-11.8%

-12.6%

However, U.K. firms may offer discounted prices amid lower input costs coupled with the slowdown in consumption, and a weak inflation report may drag on interest rate expectations as the majority of the BoE continues to endorse a wait-and-see approach.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Core Inflation Upticks to Annualized 0.9% or Higher

  • 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.

Bullish GBP Trade: U.K. CPI Report Fails to Meet 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:

GBPNZD Marks Another Failed Attempt- Short Scalps Favored Sub 2.3942

GBP/USD Breakout Hinges on Sticky UK CPI- AUD to Face RBA Minutes

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Tightening race between the Fed/BoE to normalize monetary policy may spur a larger retracement of the decline from the previous year as GBP/USD retains the bullish trend from earlier this year; has already retraced 50% of the decline from July 2014, but has failed to close above the Fibonacci retracement around 1.5880.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since the beginning of July, with the ratio working its way back towards recent extremes as it advances to +1.37 as 58% of traders are long.
  • Interim Resistance: 1.5750 (23.6% retracement) to 1.5780 (38.2% retracement)
  • Interim Support: 1.5330 (78.6% retracement) to 1.5350 (50% 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)

JUN 2015

07/14/2015 08:30 GMT

0.9%

0.8%

+3

+160

June 2015 U.K. Core Consumer Price Index

GBP/USD Chart

The U.K. Consumer Price Index (CPI) held flat in June after increasing an annualized 0.1% the month prior, while the core inflation rate unexpectedly shrank to a 14-year low of 0.8% from 0.9% during the same period. Even though Bank of England (BoE) Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs, subdued consumer price growth may encourage the central bank to retain its wait-and-see approach throughout 2015 in an effort to encourage a stronger recovery. Despite the weaker-than-expected CPI print, the market reaction was largely limited as the BoE was scheduled to testify in front of Parliament later in the day, with the pair rallying into the 1.5600 handle following the fresh batch of central bank rhetoric to end the day at 1.5634.

--- 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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