- 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:
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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
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!
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Impact that the U.K. CPI has had on GBP during the last release
| Period | Data Released | Estimate | Actual | Pips Change | Pips Change |
|---|---|---|---|---|---|
FEB 2016 | 03/22/2016 09:30 GMT | 0.4% | 0.3% | +12 | -67 |
February 2016 U.K. Consumer Price Index (CPI)
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.
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--- 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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