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GBP/USD Recovery to Gain Traction on Rising UK Consumer Prices (CPI)

GBP/USD Recovery to Gain Traction on Rising UK Consumer Prices (CPI)

2016-07-19 04:00:00
David Song, Strategist
Share:

- U.K. Consumer Price Index (CPI) to Rise for Third Time in 2016.

- Core Rate of Inflation to Increase for First Time Since March.

For more updates, sign up for David's e-mail distribution list.

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:

DailyFX Calendar

Click Here for the DailyFX Calendar

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

GBP/USD Daily Chart
  • 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!

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. Consumer Price Index 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)

MAY

2016

06/14/2016 08:30 GMT

0.4%

0.3%

0

-31

May 2016 U.K. Consumer Price Index

GBP/USD 5-Minute

GBP/USD Chart

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

Read More:

Technical Focus: Copper Base Still a Work in Progress

Silver Prices: Spiral Higher Triggers Historical Momentum Readings

USD/CAD Technical Analysis: Looking Ready To Claw-Back H1 Losses

USD/JPY Technical Analysis: The Proverbial Falling Knife

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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