GBP/USD to Pare Losses on Strong U.K. Consumer Price Index (CPI)
- U.K. Consumer Price Index (CPI) to Expand for Third Time in 2016.
- Core Rate of Inflation to Increase for Second Time in 2016.
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Trading the News: U.K. Consumer Price Index (CPI)
A pickup in the headline & core U.K. Consumer Price Index (CPI) may spark a near-term rebound in GBP/USD as it puts pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.
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Why Is This Event Important:
Even though the economic outlook remains clouded by the U.K. Referendum on June 23, signs of heightening price pressures may encourage the BoE to adopt a more hawkish tone for monetary policy as Governor Mark Carney and Co. see a risk of overshooting the 2% inflation-target over the policy horizon.
Expectations: Bullish Argument/Scenario
|Trade Balance (APR)||-3.700B||-3.294B|
|Private Consumption (QoQ) (1Q P)||0.5%||0.7%|
|Retail Sales ex. Auto Fuel (MoM) (APR)||0.6%||1.5%|
Improved demand from home and abroad may boost U.K. prices, and a stronger-than-expected CPI report may spark a bullish reaction in the sterling as it fuels interest-rate expectations.
Risk: Bearish Argument/Scenario
|M4 Money Supply (YoY) (APR)||--||1.0%|
|Net Consumer Credit (APR)||1.6B||1.3B|
|Gross Domestic Product (YoY) (1Q P)||2.1%||2.0%|
Nevertheless, the slowdown in private-sector credit accompanied by signs of a lackluster recovery may encourage U.K. firms to offer discounted prices, and a dismal development may spur further decline in GBP/USD as market participants push out bets for a BoE rate-hike.
How To Trade This Event Risk(Video)
Bullish GBP Trade: U.K. Headline & Core Inflation Pick Up in May
- 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: CPI Report Falls Short of 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 reverse.
Potential Price Targets For The Release
- GBP/USD may continue to carve a near-term series of lower highs & lows and may ultimately give back the rebound from the February low (1.3834) as it fails to preserve the upward trend from earlier this year, with the Relative Strength Index (RSI) largely following suit.
- Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
- Interim Support: 1.3870 (78.6% expansion) and 1.3960 (50% expansion)
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Impact that the U.K. Consumer Price Index has had on GBP during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|05/17/2016 08:30 GMT||0.5%||0.3%||-12||-33|
April 2016 U.K. Consumer Price Index
The U.K. Consumer Price Index (CPI) increased an annualized 0.3% in April after expanding 0.5% during the previous month, while the core rate of inflation narrowed to an annualized 1.2% from 1.5% during the same period amid forecasts for a 1.4% print. Subdued price pressures may encourage the Bank of England (BoE) to preserve its current policy throughout 2016, but the central bank may adopt a more hawkish tone over the coming months as Governor Mark Carney pledges that the next move will be to normalize monetary policy. Nevertheless, the British Pound struggled to hold its ground following the weaker-than-expected CPI prints, with GBP/USD pulling back from the 1.4500 handle to end the day at 1.4459.
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--- Written by David Song, Currency Analyst
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