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Rising U.K. Headline & Core Inflation to Fuel GBP/USD Rebound

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- U.K. Consumer Price Index (CPI) to Expand Annualized 1.9%- Fastest Since June 2014.

- Core Rate of Inflation to Pick Up for Third Straight Month; 1.7% Marks Highest Reading Since August 2014.

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

A further pickup in the U.K.'s Consumer Price Index (CPI) may fuel a larger recovery in GBP/USD as it puts increased pressure on the Bank of England (BoE) to move away from its highly accommodative policy stance.

What's Expected:

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Why Is This Event Important:

Heightening price pressures in the U.K. may push the Monetary Policy Committee (MPC) to adopt a more hawkish outlook as board member Kristen Forbes warns the central bank may have to act on the inflation-overshoot 'even if it mea ns reversing recent adjustments. ' In turn, Governor Mark Carney and Co. may continue to change their tune over the coming months, but it seems as though the central bank is in no rush to move away from its easing-cycle as officials reiterate 'm onetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target. '

Expectations: B ullish Argument/Scenario

Release Expected Actual
Gross Domestic Product (YoY) (4Q A) 2.1% 2.2%
CBI Business Optimism (JAN) -8 15
Jobless Claims Change (DEC) 5.0K -10.1K

The pickup in private-sector activity accompanied by the ongoing improvement in labor market dynamics may generate a stronger-than-expected CPI print, and another expansion in the headline as well as core rate of inflation may spark a bullish reaction in sterling as it boosts interest rate expectations.

Risk: B earish Argument/Scenario

Release Expected Actual
BRC Sales (YoY) (JAN) 0.9% -0.6%
M4 Money Supply (MoM) (DEC) -- -0.5%
Retail sales ex. Auto Fuel (MoM) (DEC) -0.4% -2.0%

However, dwindling sales paired with the slowdown in private-sector lending may encourage U.K. firms to offer discounted prices, and a lackluster inflation report may produce a limited reaction and keep the broader outlook for sterling tilted to the downside as the BoE anticipates ' a projected path of inflation that is similar to the one expected in November, despite the stronger growth outlook. '

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How To Trade This Event Risk ( Video )

Bullish GBP Trade: Headline & Core Inflation Continues to Pick Up in January

  • Need a green, five-minute candle following the print to consider a long GBP/USD position.
  • If market reaction favors a long sterling trade, buy 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.

Bullish GBP Trade: U.K. CPI Report Falls 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

GBP / USD Daily

Chart - Created Using Trading View

  • The British Pound remains at risk of facing near-term headwinds as the U.K. prepares to trigger Article 50 of the Lisbon Treaty over the coming weeks; nevertheless, the pound-dollar exchange rate may continue to track the late-2016 range over the near-term as the BoE shows a greater willingness to gradually move away from its easing-cycle, with a closing price above 1.2630 (23.6% retracement) to 1.2680 (50% retracement) raising the risk for a more meaningful run at 1.2860 (61.8% retracement).
  • Interim Resistance: 1.2915 (September low) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

Check out the short-term technical levels that matter for EUR/GBP heading into the report !

Impact that the U.K. 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)
DEC201 6 01/17/2017 09:30 GMT 1.4% 1.6% -36 +248

December 2016 U.K. Consumer Price Index (CPI)

GBP/USD 5-Minute

GB/USD Chart

Chart - Created Using Trading View

The U.K. Consumer Price Index (CPI) climbed to 1.6% per annum after expanding an annualized 1.2% in November, while the core rate of inflation unexpectedly advanced 1.6% during the same period amid forecasts for a 1.4% print. A deeper look at the report showed prices for clothing and footwear pick up for the second consecutive month in December, with transportation costs rising an annualized 3.7% during the same period, while prices for food & beverages narrowed another 1.1% after contracting 2.0% in November. Despite the limited market reaction to the better-than-expected CPI report, the British Pound gained ground after Prime Minister Theresa May outlined plans for a parliament-vote on the EU referendum, with GBP/USD closing the day at 1.2417.

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--- Written by David Song, Currency Analyst

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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