- U.K. Consumer Price Index (CPI) to Exceed 2% Target for First Time Since 2013.

- Core Rate of Inflation to Climb Annualized 1.7%- Fastest Pace Since August 2014.

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

A pickup in the U.K.’s headline and core Consumer Price Index (CPI) may fuel the near-term rebound in GBP/USD as it raises the risk of seeing a greater dissent within Bank of England (BoE).

What’s Expected:

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Why Is This Event Important:

Above-target inflation may spark a growing rift within the Monetary Policy Committee (MPC) following the 8 to 1 vote in March, but the discord could be short lived with board member Kristen Forbes scheduled to depart the central bank at the end of June. With that said, Governor Mark Carney may continue to tame interest rate expectations and reiterate ‘monetary policy can respond, in either direction’ as Prime Minister Theresa May plans to trigger Article 50 of the Lisbon Treaty on March 29. The U.K.’s departure from the European Union (EU) may heighten the bearish sentiment surrounding the British Pound especially as Scotland appears to be on course to hold a second referendum, and renew fears of a ‘hard Brexit’ may push the central bank to further support the real economy as ‘the Committee expects a slowdown in aggregate demand over the course of this year.’

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (JAN)

1.4B

1.4B

Lloyds Business Barometer (FEB)

--

40

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

2.2%

2.4%

Improved business confidence along with the recent uptick in private-sector lending may offer a meaningful boost to U.K. price growth, and a stronger-than-expected CPI report may foster a bullish reaction in the British Pound as it puts pressure on the BoE to normalize monetary policy sooner rather than later.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

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

2.5%

2.3%

Gross Domestic Product (YoY) (4Q P)

2.2%

2.0%

Retail sales ex. Auto Fuel (MoM) (JAN)

0.7%

-0.2%

Nevertheless, subdued wage growth paired with the weakness in household spending may encourage U.K. firms to offer discounted prices, and another below-forecast print may trigger near-term headwinds for sterling as it drags on interest-rate expectations.

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How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline Reading Exceeds 2% Target, Core Inflation Upticks in February

  • Need a green, five-minute candle following the release to consider a long GBP/USD entry.
  • If the market reaction favors a long British Pound 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.

Bullish GBP Trade: U.K. CPI Report Fails to Meet Market Expectations

  • 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

  • The recent series of higher highs & lows keeps the near-term outlook tilted to the topside, with GBP/USD coming up against a near-term hurdle around 1.2460 (61.8% expansion) to 1.2500 (38.2% retracement), but the broader outlook remains tilted to the downside as price & the Relative Strength Index (RSI) preserve the bearish formations carried over from December.
  • Interim Resistance: 1.2915 (September low) 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 EUR/GBP heading into the report!

Impact that the U.K. CPI report 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)

JAN

2017

02/14/2017 09:30 GMT

1.9%

1.8%

-59

-52

January 2017 U.K. Consumer Price Index (CPI)

GBP/USD 5-Minute

GBP/USD Chart

Chart - Created Using Trading View

The U.K. Consumer Price Index (CPI) climbed an annualized 1.8% in January to mark the fastest pace of growth since June 2014, while the core rate of inflation unexpectedly held steady at 1.6% per annum for the second month in January. A deeper look at the report showed the weaker-than-expected print was larger drive by a 0.5% decline in prices for food & beverage, while Transportation costs grew an annualized 5.7% on the back of higher energy prices. The British Pound struggled to hold its ground following the weaker-than-expected print, with GBP/USD slipping below the 1.2500 handle to end the day at 1.2466.

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Read More:

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--- Written by David Song, Currency Analyst

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

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