GBP/USD to Carve Lower-Low on Slowing U.K. CPI; 1.5900 in Focus

- U.K. Consumer Price Index (CPI) of 1.4% Would Mark Lowest Reading Since 2009.

- Core Rate of Inflation to Downtick for The Fourth Time This Year.

Trading the News: U.K. Consumer Price Index

A further slowdown in the U.K.’s Consumer Price Index (CPI) may bring up fresh monthly lows in the GBP/USD as it gives the Bank of England (BoE) greater scope to retain its highly accommodative policy stance for an extended period of time.

What’s Expected:

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Why Is This Event Important:

Subdued price growth in the U.K. may continue to foster a 7-2 split within the Monetary Policy Committee (MPC), and a weak CPI print may drag on interest rate expectations as Governor Mark Carney remains in no rush to normalize policy.

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Expectations: Bearish Argument/Scenario

Easing home prices paired with lower input costs may generated a dismal inflation print, and a marked slowdown may spark a more meaningful run at the 1.5900 handle as the GBP/USD retains the bearish momentum from July.

Risk: Bullish Argument/Scenario

However, the uptick in wage growth along with the resilience in private-sector consumption may generate a strong CPI figure, and an unexpected pickup should generate a larger rebound in the pound-dollar as it renews bets for higher borrowing costs in the U.K.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. Headline & Core Inflation Weakens in September

• Need red, five-minute candle following the release to consider a short British Pound trade
• If market reaction favors selling sterling, 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: CPI Report Tops Market Forecasts

• Need green, five-minute candle to favor a long GBP/USD trade
• Implement same setup as the bearish British Pound trade, just in reverse

Read More:

COT: British Pound Speculators Flip to Net Short Position

Price & Time: Do or Die Levels For Risk?

Potential Price Targets For The Release

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

• String of lower-highs continue to favor the downside, especially with the longer-dating bearish RSI momentum in play
• Interim Resistance: 1.6280 (38.2% retracement) to 1.6300 (50.0% retracement)
• Interim Support: 1.5890 (61.8% retracement) to 1.5900 (50.0% expansion)

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Impact that the U.K. CPI report has had on GBP during the last release

August 2014 U.K. Consumer Price Index

The U.K.’s Consumer Price Index (CPI) slowed as expected to an annualized 1.5% in August from 1.6% the month prior. However, the core rate of inflation beat market forecasts as the reading unexpectedly advanced to 1.9% from 1.8% in July. Easing price pressures was mainly seen in food and non-alcoholic drinks, which marked the largest decline in more than a decade. Subdued inflation increases the probability that the Bank of England (BoE) will retain its current policy throughout 2014, but we may see a growing rift within the central bank amid the stickiness in the core CPI. The sterling showed a choppy reaction following the mixed print, but the GBP/USD firmed up during the North American trade to end the day at 1.6275.

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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