Trading the News: U.K. Consumer Price Index

What’s Expected:
Time of release: 02/12/2013 9:30 GMT, 4:30 EST
Primary Pair Impact: GBPUSD
Expected: 2.7%
Previous: 2.7%
DailyFX Forecast: 2.7% to 2.8%

Why Is This Event Important:

U.K. consumer prices are projected to increase 2.7% for the fourth consecutive month in January, and the lack of stronger price growth may weigh on the British Pound as market participants still see scope for more quantitative easing. At the same time, there’s speculation that the Bank of England will lower its growth forecast while delivering its quarter inflation report due out later this week, and a soft CPI print may encourage the central bank to strike a more neutral tone for monetary policy in an effort to encourage a stronger recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

GfK Consumer Confidence Survey (JAN)

-28

-26

Net Consumer Credit (DEC)

0.2B

0.6B

Jobless Claims Change (DEC)

0.5K

-12.1K

The Downside

Release

Expected

Actual

NIESR GDP Estimate (JAN)

—

0.0%

Average Weekly Earnings ex Bonus (3MoY) (NOV)

1.5%

1.4%

Retail Sales ex Auto Fuel (MoM) (DEC)

0.1%

-0.3%

The ongoing expansion in private sector credit along with the improvement in the labor market may encourage businesses to pass on higher costs onto consumers, and an unexpected uptick in the headline reading for inflation may prompt the BoE to adopt a more hawkish tone for monetary policy as price growth is expected to hold above target over the policy horizon. However, fears of a triple-dip recession along with the slowdown in household spending may push firms to offer discounted prices, and a soft CPI print may drag on the local currency as it raises the scope for additional monetary support.

Potential Price Targets For The Release

As the GBPUSD continues to threaten the bullish trend dating back to 2009, a dismal CPI print may prompt the pair to give back the rebound from the previous year, and the sterling may work its way back towards the 50.0% Fibonacci retracement from the 2009 low to high around 1.5260 should the BoE inflation report highlight a greater willingness to expand the balance sheet further. However, a stronger-than-expected inflation report should a more meaning rebound in the exchange rate, and we may see the pound-dollar make another run at the 1.6300 figure as it appears to be carving out a higher low.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the headline reading for inflation is expected to hold steady in January, but an uptick in price growth should pave the way for a long British Pound trade as market participants scale back bets for more QE. Therefore, if the consumer price report tops market expectations, we will need a green, five-minute candle following the release to establish a long entry on two-lots of GBPUSD. Once these conditions are fulfilled, 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 cost once the first trade hits its mark in order to lock in our profits.

On the other hand, the recent weakness in private sector consumption along with fears of another recession may drag on consumer prices, and a weak print may spark a sharp selloff ahead of the BoE inflation report as it fuels speculation for more easing. As a result, if the development misses forecast, we will implement the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

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)

DEC 2012

01/15/2013 9:30 GMT

2.7%

2.7%

-23

-32

November 2012 U.K. Consumer Price Index

The headline reading for U.K. held steady at 2.7% for the third consecutive month in December, while the core rate unexpectedly slipped to 2.4% to mark the first decline since August. Indeed, the downtick in underlying inflation dragged on the British Pound, with the GBPUSD slipping below the 1.6075 figure, and the sterling struggled to hold its ground throughout the North America trade as the pair closed at 1.6062.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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Source: Daily fx