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Rising U.K. Consumer Price Index (CPI) Risks Larger GBP/USD Rebound

Rising U.K. Consumer Price Index (CPI) Risks Larger GBP/USD Rebound

2016-04-12 04:00:00
David Song, Currency Strategist
Share:

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

- Core Rate of Inflation to Advance Annualized 1.3% to Mark First Rise in 2016.

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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 a pickup in the core rate of inflation may boost the appeal of the sterling and spur a larger 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:

DailyFX Calendar

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Why Is This Event Important:

Even though the Monetary Policy Committee (MPC) is widely expected to preserve the record-low interest rate ahead of the U.K. Referendum in June, heightening price pressures may prompt Governor Mark Carney to adopt a more hawkish tone over the coming months as the BoE sees a risk of overshooting the 2% inflation-target over the policy horizon.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (4Q F)

1.9%

2.1%

Lloyds Business Barometer (MAR)

--

43

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

2.1%

2.2%

Improved confidence accompanied by signs of a stronger-than-expected recovery may boost consumer prices, and a marked uptick in the headline as well as the core rate of inflation may spur a bullish reaction in the British Pound as it boosts interest-rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance (FEB)

-3.400B

-4.840B

Unit Labor Costs (YoY) (4Q)

1.9%

1.3%

Net Consumer Credit (FEB)

1.3B

1.3B

Nevertheless, U.K. firms may increase their efforts to draw domestic demand amid the slowdown in private-sector lending accompanied by the weakening outlook for the global economy, and a soft inflation report may spur a near-term selloff in 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 Upticks in March

  • Need green, five-minute candle following the print to consider a long GBP/USD trade.
  • If market reaction favors buying sterling, 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: U.K. CPI Report Falls Short of Market Expectations

  • Need red, five-minute candle to favor a short GBP/USD trade.
  • Implement same setup as the bullish 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 continue to track sideways as it preserves the March range, but the bullish tilt on the Relative Strength Index (RSI) may foster a larger rebound over the near-term especially as the pair appears to be carving an inverse head-and-shoulders formation.
  • 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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

FEB

2016

03/22/2016 09:30 GMT

0.4%

0.3%

+12

-67

February 2016 U.K. Consumer Price Index (CPI)

GBP/USD Chart

The U.K. Consumer Price Index (CPI) unexpectedly held steady at an annualized 0.3% in February, while the core rate of inflation increased 1.2% for the second-consecutive month during the same period. Even though the Bank of England (BoE) sees a ‘solid’ recovery, subdued price growth may keep the central bank on the sidelines throughout the first-half of 2016 especially as the U.K. Referendum clouds the economic outlook for the region. The initial market reaction was largely mixed, with GBP/USD falling back from the 1.4300 handle to end the day at 1.4204.

Read More:

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USD/CAD Technical Analysis: Bearish Evidence Continues To Build

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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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