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GBP/USD Risks Larger Rebound on Rising UK CPI; 1.2860 Hurdle in View

GBP/USD Risks Larger Rebound on Rising UK CPI; 1.2860 Hurdle in View

2016-12-13 04:00:00
David Song, Strategist
Share:

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

- Core Rate of Inflation to Rebound to Annualized 1.3% in November.

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

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

A rebound in the U.K. Consumer Price Index (CPI) may fuel a largerGBP/USD relief rally ahead of the Bank of England’s (BoE) last interest rate decision for 2016 as heightening price pressures dampen speculation for additional monetary support.

What’s Expected:

DailyFX Calendar

Click Here for the DailyFX Calendar

Why Is This Event Important:

Evidence of stronger price growth may push the BoE to adopt a more hawkish tone ahead of 2017 as Governor Mark Carney and Co. continue to warn ‘there are limits to the extent to which above-target inflation can be tolerated,’ and the central bank may gradually move away from its easing-cycle over the coming months as officials warn ‘monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.’ However, another slowdown in the CPI may curb the recent recovery in GBP/USD, and the Monetary Policy Committee (MPC) may have little choice but to further insulate the real economy as the U.K. prepare to depart from the European Union (EU).

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (OCT)

1.5B

1.6B

Retail Sales ex Auto Fuel (MoM) (OCT)

0.4%

2.0%

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

2.4%

2.4%

Higher wages accompanied by the pickup in private-sector spending may encourage U.K. firms to raise consumer prices, and a marked rebound in the headline and core rate of inflation may trigger a bullish reaction in the sterling as it boosts interest-rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

BRC Shop Price Index (YoY) (NOV)

--

-1.7%

Lloyds Business Barometer (NOV)

--

32

GfK Consumer Confidence (NOV)

-4

-8

Nevertheless, waning confidence paired with the concerns surrounding ‘Brexit’ may drag on price growth, and another dismal CPI report may weigh on the exchange rate as it puts increased pressure on the BoE to further embark on its easing-cycle.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core Inflation Rebound in November

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

  • Need red, five-minute candle to favor a short GBP/USD position.
  • Implement same setup as the bullish British Pound position, just in reverse.

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • GBP/USD looks poised to extend the relief rally following the ‘British Pound’ flash crash as it comes off from channel support, with the Relative Strength Index (RSI) highlighting a similar dynamic as it preserves the bullish formation carried over from October; next topside region of interest coming in around 1.2860 (61.8% retracement) followed by the major former-support zone from the summer months.
  • Interim Resistance: 1.2920 (100% expansion) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

Check out the short-term technical levels that matter for GBP/JPY heading into the report!

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)

OCT

2016

11/15/2016 09:30 GMT

1.1%

0.9%

-30

+4

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

GBP/USD 5-Minute

GBP/USD Chart

The U.K. Consumer Price Index (CPI) unexpectedly slowed to an annualized 0.9% in October after expanding 1.0% during the previous month, while the core rate of inflation slipped to 1.2% per annum from 1.5% during the same period. A deeper look at the report showed the cost for food & beverages narrowed 2.4% per annum to lead the slowdown, with prices for clothing & footwear slipping an annualized 0.7%, while transportation costs increased 2.3% after expanding 1.2% in September. The British Pound struggled to hold its ground following the disappointing figures, but the market reaction was short-lived, with GBP/USD bouncing back from the 1.2400 region to end the day at 1.2455.

Get our top trading opportunities of 2016 HERE

Read More:

Gold Trades to New Lows, Silver Stays Stubbornly Strong

USD/CAD Technical Analysis: CAD Building Momentum Into LT Support

Technical Focus: EUR/USD - How Does this End?

GBP/USD Weakness to Be Viewed as Opportunity

--- Written by David Song, Currency Analyst

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

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