GBPUSD: Trading The U.K. Consumer Price Report

By David Song, Currency AnalystMichael Boutros, Currency Strategist

Trading the News: U.K. Consumer Price Index

What’s Expected:

Time of release: 0 3 / 20 /20129:30 GMT, 5 :30EST

Primary PairImpact: GBPUSD

Expected: 3.3%

Previous: 3.6%

DailyFXForecast: 3 . 4 % to 3.6 %

Why Is This Event Important:

U.K. consumer prices are anticipated to expand 3.3% in February after expanding 3.6% in the previous month, and the slower rate of inflation may drag on the British Pound as market participants speculate the Bank of England to expand monetary policy further in 2012. However, sticky prices could instill a bullish outlook for the sterling as the central bank sees a limited risk in undershooting the 2% target for inflation, and we may see the BoE soften its dovish tone for monetary policy as the Monetary Policy Committee expects to see a more robust recovery this year.

Recent Economic Developments

The Upside

Release

Expected

Actual

Producer Price Index – Input n.s.a. (YoY) (FEB)

7.0%

7.3%

Producer Price Index – Output n.s.a. (YoY) (FEB)

3.9%

4.1%

Retail Sales ex Auto Fuel (MoM) (JAN)

-0.3%

1.2%

The Downside

Release

Expected

Actual

Jobless Claims Change (FEB)

5.0K

7.2K

ILO Unemployment Rate (3M) (JAN)

8.4%

8.4%

Average Weekly inc Bonus Earnings (3MoY) (JAN)

1.9%

1.4%

Rising input costs paired with the rebound in private sector consumption may encourage firms to prop up consumer prices, and a stronger-than-expected inflation report could produce a run at 1.6000 as market participants scale back speculation for more quantitative easing. However, subdued wage growth paired with the ongoing weakness in the labor market may lead businesses to push through discounted prices, and a soft CPI report could spark dovish comments from the BoE as the central bank aims to stem the downside risks for growth and inflation. In turn, we may see the GBPUSD struggle to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50, and the pair may give back the advance from earlier this year as investors increase bets for more easing.

Potential Price Targets For The Release

A look at the encompassing structure of the sterling highlights key daily resistance at the 78.6% Fibonacci retracement taken from the descent off the February highs just above the 1.59-figure. Note that daily RSI now looks poised for a tag of trendline resistance dating back to February 7th with a breach here likely to fuel the pound with enough momentum to top the 1.59-resistance barrier. Topside targets stand with the 2012 highs just shy of the 1.60-handle.

The pound recentlybroke above channel resistance dating back to March 1st with theGBPUSD well supported in the interim as the dollar remains on thedefensive. Our medium-term outlook on the pound remains weighted tothe topside with interim resistance seen at 1.592 5 backed by the 100%Fibonacci extension taken from the February 22nd and March 12thtroughs at 1.5945 and 1.5975. Extended break targets are eyedhigher at the 123.6% extension at 1.6025. Initial support restswith the 78.6% extension at 1.5870 and 1.5850 with subsequentfloors seen lower at the 61.8% extension at 1.5815, 1.5775, and the38.2% extension at 1.5735. Should the print prompt a bullishreaction in the pound look to target topside levels with a breachabove 1.5945 offering further conviction on our directionalbias.

How To Trade This Event Risk

Forecasts for a slower rate of inflation instills a bearish outlook for the sterling, but an above-forecast print could pave the way for a long British Pound trade as market participants curb speculation for more QE. Therefore, if the CPI crosses the wires at 3.3% or higher, we will need to see a green, five-minute candle following the release to establish a long entry on two-lots of GBPUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to lock-in our profits.

In contrast, the slowdown in wage growth paired with the ongoing weakness in the labor market may prompt businesses to dampen consumer prices, and a soft inflation report is likely to weigh on the exchange rate as investors see the BoE taking additional steps to shore up the real economy. As a result, if the CPI comes in below forecast, we will carry out the same strategy for a short pound-dollar trade as the long position laid out above, just in the opposite direction.

Impact that the U.K. Consumer Price report has had on GBP during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 201 2

0 2 /1 4 /2012 9:30 GMT

3.6%

3.6%

+26

-44

January 201 2 U.K.Consumer Price Index

The headline reading for U.K. inflation slowed to 3.6% from 4.2% in December while the core consumer price index grew 2.6% during the same period to mark the slowest pace of growth since July 2010. Indeed, the initial reaction to the in-line print was short-lived, with the GBPUSD climbing back above 1.5750, but the sterling struggled to hold its ground during the North American trade as the exchange rate closed at 1.5689.

--- Written by David Song, Currency Analyst andMichael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Followme on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comorfollow him on Twitter @MBForex.

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@dailyfx.com.

To be added to Michael’s email distributionlist, send an email with subject line “DistributionList” to mboutros@dailyfx.com

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading theNews’ For Additional Resources
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2012/03/20/GBPUSD_Trading_the_U.K._Consumer_Price_Report.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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