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Subdued Core UK Consumer Price Index (CPI) to Rattle GBP/USD Recovery

Subdued Core UK Consumer Price Index (CPI) to Rattle GBP/USD Recovery

David Song, Strategist

- U.K. Consumer Price Index (CPI) to Expand Annualized 3.0%- Fastest Pace of Growth Since 2012.

- Core Rate of Inflation to Hold Steady at 2.7% per Annum.

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

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

U.K. CPI

Even though the U.K Consumer Price Index (CPI) is expected to increase for the second consecutive month, another 2.7% print for the core rate of inflation may undermine the near-term advance in GBP/USD as it encourages the Bank of England (BoE) to preserve the record-low interest rate throughout 2017.

Stickiness in the core CPI may ultimately trigger a bearish reaction in the British Pound as raises the risk for another 7 to 2 split, and the majority of the Monetary Policy Committee (MPC) may largely endorse a wait-and-see approach at the next policy meeting on November 2 as ‘there remain considerable risks to the outlook.’

However, another batch of above-forecast prints may fuel the recent series of higher highs & lows in GBP/USD, and Governor Mark Carney and Co. may start to move away from its easing-cycle as ‘a 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.’

Impact that the U.K. Consumer Price Index (CPI) has had on GBP/USD during the previous print

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

AUG

2017

09/12/2017 08:30:00 GMT

2.8%

2.9%

+55

+80

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

GBP/USD 5-Minute Chart

GBP/USD Chart

The U.K. Consumer Price Index (CPI) climbed an annualized 2.9% in August, with the core rate of inflation highlighting a similar dynamic as the reading advanced to 2.7% per annum from 2.4% in July. A breakdown of the report showed prices for clothing & footwear increased 2.4% during the month, with the costs for household goods climbing 1.8%, while prices for food & beverages held flat for the second consecutive month. The British Pound gained ground following the stronger-than-expected CPI print, with GBP/USD coming off of the 1.3200 handle to end the day at 1.3283.

How To Trade This Event Risk(Video)

Bearish GBP Trade: Core CPI Holds Steady in September

  • Need a red, five-minute candle following the CPI print to consider a short GBP/USD position.
  • If market reaction favors a bearish British Pound trade, sell GBP/USD with two separate lots.
  • Set stop at the near-by swing high/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.

Bullish GBP Trade: U.K. CPI Continues to Exceed Market Expectations

  • Need a green, five-minute GBP/USD candle to consider a long British Pound position.
  • Carry out the same setup as the bearish 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

  • Keep in mind, the broader outlook for GBP/USD remains constructive as it preserves the upward trend channel from earlier this year.
  • However, near-term outlook for GBP/USD remains capped by the Fibonacci overlap around 1.3300 (100% expansion) to 1.3320 (38.2% retracement) especially as the pair snaps the string of higher-highs, while the Relative Strength Index (RSI) appears to be turning ahead of trendline resistance.
  • In turn, GBP/USD stands at risk of giving back the rebound from the monthly-low (1.3027), with a break/close below the 1.3210 (50% retracement) region raising the risk for a move back towards 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement).
  • 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

Retail Sentiment

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

Retail trader data shows 50.8% of traders are net-long GBP/USD with the ratio of traders long to short at 1.03 to 1. The number of traders net-long is 10.0% higher than yesterday and 8.6% lower from last week, while the number of traders net-short is 4.3% higher than yesterday and 0.1% lower 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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