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Slowing Core U.K. CPI to Undermine GBP/USD Rebound

Slowing Core U.K. CPI to Undermine GBP/USD Rebound

2017-04-11 04:00:00
David Song, Currency Strategist
Share:

- U.K. Consumer Price Index (CPI) to Hold Steady at Annualized 2.3%- Highest Since 2013.

- Core Rate of Inflation to Narrow from Fastest Pace of Growth Since June 2014.

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

The U.K.’s Consumer Price Index (CPI) may spark a limited reaction as the headline is projected to hold steady at an annualized 2.3%, but a downtick in the core rate of inflation may weigh on GBP/USD as it encourages the Bank of England (BoE) to preserve a wait-and-see approach for monetary policy.

What’s Expected:

DailyFX Calendar

Click Here for the DailyFX Calendar

Why Is This Event Important:

Despite the 8 to 1 split in March, the majority of the Monetary Policy Committee (MPC) may try to buy more time as the U.K. officially starts its departure from the European Union (EU), and Governor Mark Carney may continue to tame interest-rate expectations as officials reiterate ‘monetary policy can respond, in either direction.’ However, another stronger-than-expected CPI print may push the BoE to change its tune as the central bank pledges ‘there are limits to the extent that above-target inflation can be tolerated,’ and the committee may show a greater willingness to move away from its easing-cycle as official warn ‘some modest withdrawal of monetary stimulus over the course of the forecast period remains appropriate.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

NIESR GDP Estimate (MAR)

0.6%

0.5%

Lloyds Business Barometer (MAR)

--

35

Average Weekly Earnings ex. Bonus (JAN)

2.5%

2.3%

Waning confidence accompanied by the ongoing weakness in household earnings may drag on price growth, and a marked slowdown in the core rate of inflation may produce a bearish reaction in the British Pound as it drags on interest-rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (FEB)

1.3B

1.4B

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

0.3%

1.3%

Employment Change (3Mo3M) (JAN)

87K

92K

Nevertheless, U.K. firms may boost consumer prices amid the pickup in private-sector consumption, and the pound-dollar exchange rate may stage a near-term rebound should the inflation report continue to exceed market forecasts.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bearish GBP Trade: Core U.K. Inflation Narrows in March

  • Need a red, five-minute candle following the release to consider a short GBP/USD entry.
  • If the market reaction favors a short British Pound trade, sell GBP/USD with two separate position.
  • Set stop at the near-by swing high/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 Continues to Top Market Projections

  • Need green, five-minute candle to favor a long GBP/USD trade.
  • Implement same setup as the bearish British Pound trade, just in the opposite direction.

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 formations from earlier this year; Cable stands at risk for further losses following the failed attempt to test the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2680 (50% retracement), with a break/close below 1.2370 (50% expansion) opening up the next downside target around 1.2270 (23.6% retracement).
  • Interim Resistance: 1.2915 (September low) 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)

FEB

2017

03/21/2017 09:30 GMT

2.1%

2.3%

+36

+60

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

GBP/USD 5-Minute

GBP/USD Chart

Chart - Created Using Trading View

The headline reading for U.K. inflation climbed an annualized 2.3% in February to mark the fastest pace of growth since 2013, with the core Consumer Price Index (CPI) also exceeding market expectations as the reading increased 2.0% per annum amid forecasts for a 1.7% print. A deeper look at the report showed rising energy costs fueling higher transportation costs, with prices for food & beverages climbing 0.9% during the same period, while prices for clothing & footwear narrowed 0.1% after holding flat in January. The British Pound gained ground following the inflation report, with GBP/USD climbing above the 1.2450 region to end the day at 1.2478.

If you’re looking for trading ideas, check out our Trading Guides.

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--- 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.

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