GBP/USD to Eye Fresh July Highs on Strong U.K. CPI- 1.7200 in Focus

- U.K. Consumer Price Index (CPI) to Increase for Second-Time in 2014.

- Core Rate of Inflation to Rise for the Third-Time This Year.

Trading the News: U.K. Consumer Price Index

A pickup in the U.K.’s Consumer Price Index (CPI) may generate fresh monthly highs in the GBP/USD as it fuels expectations for a Bank of England (BoE) rate hike later this year.

What’s Expected:

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Why Is This Event Important:

The bullish sentiment surrounding the British Pound should gather pace in the second-half of the year as the BoE looks normalize monetary policy sooner rather than later, and the fundamental developments coming out of the region may continue to prop up interest rate expectations as a growing number of central bank officials adopt a more hawkish tone for inflation.

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Expectations: Bullish Argument/Scenario

Expectations for a faster recovery paired with the ongoing improvement in the labor market may prompt a stronger-than-expected CPI print, and a marked pickup in the headline reading for inflation may generate a bullish reaction in the GBP/USD as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

However, subdued wages along with the slowdown in private sector credit may drag on consumer prices, and a dismal inflation report may spur a larger correction in the GBP/USD as it dampens bets of seeing a rate hike later this year.

Read More:

British Pound May Fall as Soft Inflation Data Undermines BOE Bets

Weekly Price & Time: USD/JPY Inching Towards the Lows of the Year

How To Trade This Event Risk(Video)

Bullish GBP Trade: U.K. Inflation Climbs to 1.6% or Higher

• Need green, five-minute candle following the release to consider a long British Pound trade
• If market reaction favors buying sterling, go long 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

Bearish GBP Trade: CPI 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 reverse

Potential Price Targets For The Release

GBP/USD Daily

Chart - Created Using FXCM Marketscope 2.0

• Topside Targets Remain Favorable as Price & RSI Retain Bullish Trend
• Interim Resistance: 1.7200 Pivot to 1.7220 (100.0% expansion)
• Interim Support: 1.6890 (38.2% expansion) to 1.6900 (61.8% expansion)

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

May 2014 U.K. Consumer Price Index

U.K. consumer prices slowed to an annualized 1.5% in May from 1.8% the month prior, while the core rate of inflation narrowed to 1.6% during the same period after expanding 2.0% in April, which marked the fastest pace of growth since August 2013. The British Pound struggled to hold its ground following the weaker-than-expected CPI print, with the GBP/USD slipping back below the 1.6950 region, but the sterling regained its footing during the North American trade, with the pair ending the day at 1.6990.

--- Written by David Song, Currency Analyst

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

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