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Strong U.K. CPI Report to Fuel GBP/USD Rebound

Strong U.K. CPI Report to Fuel GBP/USD Rebound

David Song, Shuyang Ren,

Share:

- Headline U.K. Consumer Price Index (CPI) to Pick Up for Fourth Consecutive Month.

- Core Rate of Inflation to Hold Steady at Annualized 1.2% for Second Straight Month.

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Trading the News: U.K. Consumer Price Index (CPI)

Another uptick in the U.K. Consumer Price Index (CPI) accompanied by stickiness in the core-rate of inflation may generate a near-term rebound in GBP/USD as it puts increased pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.

What’s Expected:

GBP/USD CPI

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Why Is This Event Important:

The BoE looks poised to retain its current policy ahead of the U.K. Referendum in June as the Monetary Policy Committee (MPC) remains unanimous in keeping the benchmark interest rate at the record-low, but signs of stronger price growth may encourage Governor Mark Carney to adopt a more hawkish tone over the coming months as the central bank sees a risk of overshooting the 2% inflation-target over the policy horizon.

Expectations: Bullish Argument/Scenario

ReleaseExpectedActual
Jobless Claims Change (FEB)-9.1K-18.0K
Average Weekly Earnings ex. Bonus (3MoY) (JAN)2.1%2.2%
Retail Sales ex. Auto Fuel (MoM) (JAN)0.7%2.3%

Stronger wage growth along with the pickup in household spending may encourage U.K. firms to boost consumer prices, and a stronger-than-expected CPI report may spur a bullish reaction in the British Pound as it boosts interest-rate expectations.

Risk: Bearish Argument/Scenario

ReleaseExpectedActual
Lloyds Business Barometer (FEB)--28
GfK Consumer Confidence (FEB)3
BRC Shop Price Index (YoY) (FEB)---2.0%

Nevertheless, waning confidence paired with fears surrounding the U.K. Referendum may drag on inflation, and signs of easing price growth may produce near-term headwinds for the sterling as market participants push out bets for a BoE rate-hike.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core Inflation Meet/Beat Market Forecast

  • Need red, five-minute candle following the print to consider a short GBP/USD trade.
  • If market reaction favors selling sterling, 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.

Bearish GBP Trade: U.K. CPI Report Disappoints

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

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD may largely preserve the downward trend carried over from 2015 as the BoE lags behind its U.S. counterpart, but the bearish divergence in the Relative Strength Index (RSI) may highlight an inverse head-and-shoulders formation in the exchange rate as Governor Carney continues to argue that the next move will be to normalize monetary policy.
  • Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
  • Interim Support: 1.3870 (78.6% expansion) and 1.4000 pivot

Check out the short-term technical levels that matter for GBP/USD heading into the report!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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

PeriodData ReleasedEstimateActualPips ChangePips Change

JAN

2015

02/16/2016 09:30 GMT0.3%0.3%-24-181

January 2016 U.K. CPI

GBP/USD Chart

The U.K. Consumer Price Index (CPI) increased an annualized 0.3% in January to match market forecast, while the core rate of inflation unexpectedly slowed to 1.2% from 1.4% in December amid forecasts for a 1.3% print. Subdued price pressures may encourage the Bank of England (BoE) to endorse a wait-and-see approach throughout the first-half of 2016 especially as the U.K. Referendum continues to cloud out economic outlook for the region. Despite the initial move higher, the sterling lost ground following the release, with GBP/USD sliding below the 1.4400 handle to close the day at 1.4301.

Read More:

US Dollar – Breakdown Continues, Reprieve Ahead?

AUD/USD Post-FOMC Rally at Risk Ahead of Australian Labor Report

Long-term Low in Silver?

Long Term Cyclical Influence Nears for AUD/USD

Get our top trading opportunities of 2016 HERE

--- 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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