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Strong U.K. CPI Report to Fuel Larger GBP/USD Recovery

Strong U.K. CPI Report to Fuel Larger GBP/USD Recovery

David Song, Strategist

- U.K. Consumer Price Index (CPI) to Pick Up for First Time Since June.

- Core Inflation to Climb to Annualized 1.4% After Holding Steady at 1.3% in August.

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

Trading the News: U.K. Consumer Price Index (CPI)

A material pickup in both the headline and core U.K. Consumer Price Index (CPI) may sap the bearish sentiment surrounding the British Pound and spark a larger recovery in GBP/USD especially as a growing number of Bank of England (BoE) officials see a greater threat of overshooting the 2% target for inflation.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Even though the BoE argues ‘a majority of members expect to support a further cut in Bank Rate to its effective lower bound,’ heightening price pressures may keep the Monetary Policy Committee (MPC) on the sidelines throughout the remainder of the yearas Deputy Governor Jon Cunliffe warns the next quarterly inflation due out on November 3 will reflect the sharp decline in the exchange rate. In turn, GBP/USD may face a more meaningful correction as the BoE looks poised to endorse a wait-and-see approach ahead of 2017, but the broader outlook for the sterling remains tilted to the downside as the risk of a ‘hard Brexit’ clouds the outlook for growth and inflation.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Lloyds Business Barometer (SEP)

--

24

Net Consumer Credit (AUG)

1.4B

1.6B

Retail Sales ex Auto Fuel (MoM) (AUG)

-0.7%

-0.3%

Improved business confidence paired with the expansion in private-sector credit may boost consumer prices, and a marked pickup in the headline and core rate of inflation may trigger a bullish reaction in the sterling as market participants scale back bets for the next BoE rate-cut.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Construction Output s.a. (MoM) (AUG)

0.0%

-1.5%

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

2.2%

2.1%

Producer Price Index- Output n.s.a. (YoY) (AUG)

1.0%

0.8%

Nevertheless, subdued wages accompanied by low input prices may drag on inflation, and another dismal CPI print may weigh on GBP/USD as it puts increased pressure on the BoE to implement another rate-cut in 2016.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core CPI Pick Up in September

  • Need green, five-minute candle following the print to consider a long GBP/USD trade.
  • If market reaction favors long sterling, buy 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. Inflation 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 Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for GBP/USD remains tilted to the downside as price & the Relative Strength Index (RSI) preserve the bearish trends carried over from the previous months, but the failure to close below 1.2100 (61.8% expansion) raises the risk for a larger correction in the exchange rate; will keep a close eye on the RSI, with a move with a move out of oversold territory (above 30) accompanied by a break of the bearish formation opening up the first topside target around 1.2360 (50% retracement) followed by 1.2460 (61.8% expansion).
  • Interim Resistance: 1.2920 (100% expansion) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

Impact that the U.K. Consumer Price Index (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)

AUG

2016

09/13/2016 08:30 GMT

0.7%

0.6%

-38

-133

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

GBP/USD 5-Minute

GBP/USD Chart

The U.K. Consumer Price Index (CPI) increased an annualized 0.6% for second consecutive month in August, with the core rate of inflation also highlighting a similar dynamic as the figure held steady at 1.3% during the same period. Signs of slowing price growth may encourage the Bank of England (BoE) to further support the real economy, but the central bank appears to be in no rush to push monetary policy into unchartered territory as Governor Mark Carney rules out a zero-interest rate policy (ZIRP) for the U.K. The British Pound struggled to hold its ground following the dismal inflation report, with GBP/USD pushing below the 1.3300 handle to end the day at 1.3187.

Get our top trading opportunities of 2016 HERE

Read More:

COT-Speculative US Dollar Buying Frenzy

Earnings, ECB and Inflation to Headline Heavy Data Week

Silver Prices: Dead Cat Bounce Keeps Bias Tilted Lower

DAX Battle Lines Drawn as Index Looks to Regain 2016 Losses

--- 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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