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GBP/USD Risks Larger Advance Ahead of BoE on Strong U.K. CPI Report

GBP/USD Risks Larger Advance Ahead of BoE on Strong U.K. CPI Report

2017-09-12 04:00:00
David Song, Strategist
Share:

- U.K. Consumer Price Index (CPI) to Pick Up for First Time Since May.

- Core Rate of Inflation to Increase Annualized 2.5%- Second Highest Reading for 2017.

- Sign Up & Join DailyFX Market Analyst Martin Essex LIVE to Cover the U.K. CPI Report.

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

U.K. CPI

An uptick in the headline and core U.K. Consumer Price Index (CPI) may spark a bullish reaction in GBP/USD as it puts pressure on the Bank of England (BoE) to lift the benchmark interest rate off of the record-low.

Even though the BoE is widely expected to retain the current policy at the September 14 meeting, signs of heightening price may encourage Governor Mark Carney and Co. to prepare U.K. household and businesses for higher borrowing-costs as officials argue ‘the withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.’ Nevertheless, the meeting minutes may reveal 7 to 2 split as Sir David Ramsden joins the Monetary Policy Committee (MPC), and the majority may merely attempt to buy more time as ‘GDP growth had been sluggish and was expected to remain so in the near term.’

Impact that the U.K. CPI report has had on GBP/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL

2017

07/12/2017 08:30:00 GMT

2.7%

2.6%

-38

-84

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

GBP/USD 5-Minute

GBP/USD Chart

The U.K. Consumer Price Index (CPI) unexpectedly held steady at an annualized 2.6% in July, with the core rate of inflation exhibiting a similar dynamic as the figure increased 2.4% during the same period amid forecasts for a 2.5% print. A deeper look at the report showed prices for clothing and footwear slipped another 3.0% in July, with the cost for household goods narrowing 1.2%, while transportation costs advanced 1.0% during the same period on the back of easing energy prices. The British Pound struggled to hold its ground following the below-forecast prints, with GBP/USD slipping below the 1.2900 handle to end the day at 1.2866.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core CPI Picks Up

  • Need a green, five-minute candle following the report to favor a long GBP/USD position.
  • If market reaction favors a bullish British Pound trade, buy GBP/USD with two separate lots.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

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

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

Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Check out our GBP/USD quarterly projections in our FREE DailyFX Trading Forecasts

  • GBP/USD appears to have made a failed attempt to test the August-high (1.3268) as it struggles to preserve the series of higher highs & lows from earlier this month, but the pair may stage a larger advance over the coming days as it nullifies the threat of a head-and-shoulders formation, while the Relative Strength Index (RSI) appears to be finally breaking out of the downward trend carried over from May.
  • In turn, topside targets remain on the radar, with a break/close above the 1.3300 (100% expansion) handle opening up the next region of interest around 1.3370 (78.6% expansion) followed by the 1.3460 (50% retracement) zone, which sits just above the September 2016-high (1.3445).
  • Interim Resistance: 1.3460 (50% retracement) to 1.3481 (July 2016-high)
  • Interim Support: 1.2630 (38.2% expansion) to 1.2680 (50% retracement)

GBP/USD Retail Sentiment

GBP/USD Retail Sentiment

Track Retail Sentiment in Real-Time with the New Gauge Developed by DailyFX

Retail trader data shows 30.9% of traders are net-long GBP/USD with the ratio of traders short to long at 2.23 to 1. The number of traders net-long is 10.1% higher than yesterday and 28.3% lower from last week, while the number of traders net-short is 3.2% higher than yesterday and 52.4% higher from last week.

--- 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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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