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Trading the News: U.K. Consumer Price Index - Core Rate of Inflation to Pick Up for First Time Since December 2014

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by , 06-16-2015 at 07:49 AM (1348 Views)
      
   
Trading the News: U.K. Consumer Price Index

An uptick in the headline & core U.K. Consumer Price Index (CPI) may spur fresh monthly highs in GBP/USD as it raises the Bank of Englandís (BoE) scope to remove the record-low interest rate sooner rather than later.

Whatís Expected:

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Why Is This Event Important:

BoE Governor Mark Carney may sound increasingly hawkish over the coming months as the central bank head anticipates stronger price growth in the second-half of 2015, and we may see a growing number of Monetary Policy Committee (MPC) officials prepare U.K. households & businesses for higher borrowing-costs as the economy gets on a firmer footing.

Expectations: Bullish Argument/Scenario

Release Expected Actual
Net Consumer Credit (APR) 1.0B 1.2B
Retail Sales inc. Auto Fuel (APR) 0.4% 1.2%
Average Weekly Earnings ex. Bonus (3MoY) (MAR) 2.1% 2.2%

U.K. firms may boost consumer prices amid stronger wage growth along with the expansion in private-sector credit, and a strong inflation report may instill a more bullish outlook for the sterling as the BoE remains on course to normalize monetary policy.

Risk: Bearish Argument/Scenario


Release Expected Actual
BRC Shop Price Index (YoY) (MAY) -1.8% -1.9%
GfK Consumer Confidence (MAY) 4 1
Producer Price Index n.s.a. (YoY) (APR) -1.6% -1.7%

However, waning confidence paired with falling input costs may continue to drag on price growth, and a dismal CPI print may undermine the near-term breakout in GBP/USD as market participants push back bets for a BoE rate hike.

How To Trade This Event Risk

Bullish GBP Trade: U.K. Headline & Core Inflation Upticks in May

  • Need green, five-minute candle following the release to consider a long British Pound trade.
  • If market reaction favors bullish sterling trade, long 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: Consumer Prices Fall Short of Market Forecast

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

Potential Price Targets For The Release
GBPUSD Daily

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  • GBP/USD may continue to retrace the decline from May as it breaks out of the triangle/wedge formation carried over from the previous month, with the pair showing a net 2015-gain for the first time since May 22.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd has flipped net-short GBP/USD coming into the third-week of June, with the ratio currently holding at -1.00.
  • Interim Resistance: 1.5780 (38.2% retracement) to 1.5814 (May high)
  • Interim Support: 1.5400 handle to 1.5420 (78.6% expansion)

Impact that the U.K. Core 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)
APR 2015 05/19/2015 08:30 GMT 1.0% 0.8% -43 -62

The U.K. Consumer Price Index (CPI) contracted for the first time since 1960 as price growth slipped an annualized 0.1% in April, while the core rate of inflation slowed to a 9-year low of 0.8% after expanding 1.0% the month prior. The low-inflationary environment runs the risk of seeing a further delay in the Bank of Englandís (BoE), but it seems as though the central bank will largely stay on course to normalize monetary policy over the near to medium-term as the board anticipates a stronger recovery later this year. The initial market reaction was limited and short lived, with GBP/USD dipping below 1.5550 to end the day at 1.5510.

--- Written by David Song, Currency Analyst and Shuyang Ren


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