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Rising UK CPI to Renew GBP/USD Relief Rally as BoE Drops Dovish Tone

Rising UK CPI to Renew GBP/USD Relief Rally as BoE Drops Dovish Tone

2016-11-15 04:00:00
David Song, Strategist
Share:

- U.K. Consumer Price Index (CPI) to Increase Annualized 1.1%- Highest Reading Since October 2014.

- Core Rate of Inflation to Slow from Annualized 1.5% (Fastest Rate of Growth for 2016).

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

Another pickup in the U.K. Consumer Price Index (CPI) may boost the appeal of the British Pound and fuel a larger relief rally in GBP/USD as the Bank of England (BoE) drops its dovish outlook for monetary policy and becomes increasingly concerned about overshooting the 2% target for inflation.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Heightening price pressures may keep the BoE on the sidelines for the foreseeable future as the central bank now warns ‘monetary policy can respond, in either direction,’ and Governor Mark Carney and Co. may largely endorse a wait-and-see approach for 2017 as officials argue ‘there are limits to the extent to which above-target inflation can be tolerated.’ However, a marked slowdown in the core CPI may undermine the recent recovery in GBP/USD as the fundamental outlook for the U.K. remains clouded with high uncertainty, and the BoE may have little choice but to further insulate the real economy as the new government under Prime Minister Theresa May remain on course to depart from the European Union (EU).

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (3Q A)

2.1%

2.3%

Employment Change (3Mo3M) (SEP)

76K

106K

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

2.1%

2.3%

The ongoing improvement in the labor market accompanied by signs of a stronger-than-expected growth may encourage U.K. firms to boost consumer prices, and another uptick in the headline reading for inflation may spark a bullish reaction in the sterling as market participants scale back bets for additional monetary support.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (SEP)

1.5B

1.4B

GfK Consumer Confidence (OCT)

-3

-3

Retail Sales ex. Auto Fuel (MoM) (SEP)

0.2%

0.0%

However, weak consumption paired with the slowdown in private-sector lending may drag on price growth, and a dismal development may undermine the near-term rebound in the pound-dollar as it provides the BoE’s with greater scope to further embark on its easing-cycle.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core Inflation Beat Market Expectations

  • Need green, five-minute candle following the print to consider a long GBP/USD position.
  • If market reaction favors a long sterling position, 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. Consumer Price 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 the opposite.

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • GBP/USD stands at risk for a larger relief rally following the string of failed attempts to close below the 1.2100 (61.8% expansion) handle, with the pair breaking out of the downward trend carried over from September, but the broader outlook remains tilted to the downside especially as the Relative Strength Index (RSI) appears to be turning around ahead of trendline resistance; first topside hurdle comes in around 1.2630 (38.2% expansion) to 1.2680 (50% retracement) followed by 1.2860 (61.8% retracement).
  • 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)

SEP

2016

10/18/2016 08:30 GMT

0.9%

1.0%

-16

+42

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

GBP/USD 5-Minute

GBP/USD Chart

The U.K. Consumer Price Index (CPI) advanced an annualized 1.0% in September after expanding 0.6% the month prior, while the core rate of inflation climbed 1.5% per annum amid forecasts for a 1.4% print. A deeper look at the report showed a 5.9% rise in the cost of education paired with a 1.0% rise in prices for clothing & footwear, while transportation costs also climbed 1.2% during the same period following a 1.0% rise in August. The British Pound regained its footing following the mixed market reaction, with GBP/USD bouncing back from 1.2229 to end the day at 1.2292.

Get our top trading opportunities of 2016 HERE

Read More:

US Dollar Whiplash Ends with a Trump Bump

GBP/JPY Technical Analysis: New Trend in Play after 800-Pip, 3-Day Romp

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

S&P 500 - Bears Got Trumpled, Short-term Trading Levels Noted

--- Written by David Song, Currency Analyst

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

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