Strong U.K. CPI Report to Fuel Larger GBP/USD Recovery
- 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.
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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.
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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
|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
|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
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||Pips Change|
|09/13/2016 08:30 GMT||0.7%||0.6%||-38||-133|
August 2016 U.K. Consumer Price Index (CPI)
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.
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--- Written by David Song, Currency Analyst
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