DailyFX

GBP/USD Rebound at Risk on Slowing U.K. Consumer Price Index (CPI)

David SongShuyang Ren

DailyFX.com -

- Headline U.K. Consumer Price Index (CPI) to Hold Flat for Third Time in 2015.

- Core Rate of Inflation to Expand Annualized 0.9% for Second Consecutive Month.

Trading the News: U.K. Consumer Price Index

A further slowdown in the U.K. Consumer Price Index (CPI) may generate a near-term pullback in GBP/USD as it puts increased pressure on the Bank of England (BoE) to retain its current policy throughout 2015.

What’s Expected:

GBP/USD UK CPI
GBP/USD UK CPI

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Why Is This Event Important:

However, the stickiness in the core rate of inflation may limit the downside risk for the sterling as BoE Governor Mark Carney anticipates faster price growth in the second-half of the year, and the central bank head may continue to prepare U.K. households and businesses for higher borrowing-costs should the fundamental developments show signs of a stronger recovery.

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Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (MAY)

1.1B

1.0B

CBI Trends Selling Price (JUN)

--

-7

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

-1.6%

-1.6%

Lower input costs paired with the slowdown in private-sector credit may encourage U.K. firms to offer discounted prices, and a weak CPI figure may dampen the appeal of the British Pound as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

GfK Consumer Confidence (JUN)

2

7

Retail Sales inc. Auto Fuel (MoM) (MAY)

-0.1%

0.2%

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

2.5%

2.7%

Nevertheless, improved confidence along with resilience in household consumption may prompt a strong inflation print, and a positive development may pave the way for a near-term advance in GBP/USD as the BoE remains on course to normalize monetary policy.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Headline & Core CPI Highlight Slower Price Growth

  • Need red, five-minute candle following the release to consider a short British Pound trade.

  • If market reaction favors bearish sterling trade, short 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. Inflation Exceeds Market Expectations

  • Need green, five-minute candle to favor a long GBP/USD trade.

  • Implement same setup as the bearish British Pound trade, just in reverse.

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