- U.K. Consumer Price Index (CPI) to Rise for Third Time in 2016.
- Core Rate of Inflation to Increase for First Time Since March.
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Trading the News: U.K. Consumer Price Index (CPI)
GBP/USD may stage a larger recovery over the next 24-hours of trading as market participants forecast the headline & core U.K. Consumer Price Index (CPI) to uptick in July. Indeed, signs of stronger inflation may undermine expectations for a material shift in the monetary policy outlook amid the rift within the Bank of England (BoE).
What’s Expected:
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Why Is This Event Important:
With the U.K. preparing to depart from the European Union (EU), there’s growing speculation the BoE will reestablish its easing cycle at the next interest-rate decision on August 4, but we may see another split decision to retain the current policy as the marked depreciation in the British Pound raises the risk of overshooting the 2% target for inflation.
Expectations: Bullish Argument/Scenario
| Release | Expected | Actual |
|---|---|---|
| Net Consumer Credit (MAY) | 1.5B | 1.5B |
| Retail Sales ex. Auto Fuel (MoM) (MAY) | 0.3% | 1.0% |
| Average Weekly Earnings ex. Bonus (3MoY) (APR) | 2.0% | 2.3% |
Stronger wage growth accompanied by the pickup in household spending may ultimately stoke higher inflation in the U.K., and signs of faster price growth may spark a bullish reaction in the sterling as market participants scale back bets for a meaningful easing package.
Risk: Bearish Argument/Scenario
| Release | Expected | Actual |
|---|---|---|
| Construction Output s.a. (MoM) (MAY) | -1.2% | -2.1% |
| Lloyds Business Barometer (JUN) | -- | 6 |
| Total Business Investment (YoY) (1Q F) | -- | -0.8% |
However, waning business sentiment paired with signs of a cooling housing market may drag on price growth, and a dismal CPI report may weigh on GBP/USD as it fuels speculation for additional monetary support.
How To Trade This Event Risk(Video)
Bullish GBP Trade: Headline & Core Inflation Climb Higher in June
- 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 Disappoints
- 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 Daily
- With a near-term inverse head-and-shoulders formation taking shape, GBP/USD may stage a larger recovery as the Relative Strength Index (RSI) comes off of oversold territory, with a closing price above 1.3360 (50% expansion) to 1.3370 (78.6% expansion) raising the risk for a move back towards the Fibonacci overlap around 1.3640 (38.2% retracement) to 1.3720 (61.8% expansion).
- Key Resistance: 1.4880 (50% retracement) to 1.4930 (38.2% expansion)
- Key Support: 1.2460 (61.8% expansion) to 1.2500 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. Consumer Price Index has had on GBP during the last release
| Period | Data Released | Estimate | Actual | Pips Change | Pips Change |
|---|---|---|---|---|---|
MAY 2016 | 06/14/2016 08:30 GMT | 0.4% | 0.3% | -31 |
May 2016 U.K. Consumer Price Index
GBP/USD 5-Minute
The U.K. Consumer Price Index (CPI) missed market expectations as the headline reading increased another annualized 0.3% in May, while the core rate of inflation held steady at an annualized 1.2% during the same period amid forecasts for a 1.3% print. Subdued price growth may encourage the Bank of England (BoE) to switch gears and push the central bank to reestablish its easing cycle as the U.K. Referendum clouds the economic outlook with increased uncertainty. The market reaction was largely limited, with GBP/USD struggling to hold its ground throughout the day as the pair closed at 1.4107.
Get our top trading opportunities of 2016 HERE
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--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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