Rising Threat of Above-Target U.K. CPI to Foster GBP/USD Rebound

U.K. Consumer Price Index (CPI) to Rebound in July.

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

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

UK CPI

A pickup in both the headline and core U.K. Consumer Price Index (CPI) may foster a near-term rebound in GBP/USD as it puts pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.

In response, a growing number of BoE officials may change their stance at the next meeting on September 14 as ‘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.’ However, another dismal development may continue to generate a 7 to 2 split as Sir David Ramsden joins the Monetary Policy Committee (MPC), and the British Pound may face a more bearish fate over the near-term as the majority remains in no rush to raise the benchmark interest rate off of the record-low.

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)

JUN

2017

07/18/2017 08:30:00 GMT

2.9%

2.6%

-37

-32

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

GBP/USD 5-Minute Chart

GBP/USD Chart

The U.K. Consumer Price Index (CPI) unexpectedly narrowed to an annualized 2.6% in June, with the core rate of inflation highlighting a similar behavior, with the reading slipping to 2.4% per annum from 2.6% in May. A deeper look at the report showed the weakness was led by a 1.0% decline in prices for clothing & footwear, with the cost for food & non-alcoholic beverages narrowing 0.2% in June, while household costs held flat during the same period after rising 0.6% in May. The British Pound lost ground following the series of dismal prints, with GBP/USD pushing below the 1.13050 region to end the day at 1.3039.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core CPI Picks Up in July

  • Need a green, five-minute candle following the CPI report to consider a long GBP/USD trade.
  • 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. Inflation Report Continues to Disappoint

  • Need a red, five-minute GBP/USD candle to favor a short British Pound trade.
  • 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

Chart – Created Using Trading View

  • GBP/USD stands at risk of extending the decline from the monthly-high (1.3268) as the Relative Strength Index (RSI) fails to preserve the upward trend from May; may see price exhibit a similar behavior if pound-dollar breaks the bullish formations carried over from earlier this year.
  • Break/close below 1.2950 (23.6% retracement) opens up the next downside hurdle around 1.2860 (61.8% retracement), which sits above the July-low (1.2812), followed by the 1.2800 handle (50% expansion).
  • 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 49.3% of traders are net-long GBP/USD with the ratio of traders short to long at 1.03 to 1. In fact, traders have remained net-short since June 23 when GBP/USD traded near 1.27524; price has moved 1.7% higher since then. The number of traders net-long is 12.2% higher than yesterday and 9.3% higher from last week, while the number of traders net-short is 0.6% higher than yesterday and 23.3% lower from last week.

— Written by David Song, Currency Analyst

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

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