Firming U.K. Consumer Price Index (CPI) to Fuel GBP/USD Recovery

- U.K. Consumer Price Index (CPI) to Uptick for Third-Consecutive Month.

- Core Inflation to Rebound to Annualized 1.4% Following the Unexpected Slowdown in July.

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

A pickup in both the headline and core U.K. Consumer Price Index (CPI) may encourage a larger recovery in GBP/USD as the Bank of England (BoE) faces a greater threat of overshooting the 2% target for inflation.

What’s Expected:

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Why Is This Event Important:

The BoE looks poised to further embark on its easing cycle as ‘a majority of members expect to support a further cut in Bank Rate to its effective lower bound,’ but it seems as though Governor Mark Carney will continue to rule out a zero-interest rate policy (NIRP) for the U.K. as the central bank ‘expects that by the three-year forecast horizon unemployment will have begun to fall back and that much of the economy’s spare capacity will have been re-absorbed, while inflation will be a little above the 2% target.’

Expectations: Bullish Argument/Scenario

The expanding money supply accompanied by the pickup in household earnings may boost U.K. price growth, and signs of stronger-than-expected inflation may trigger a bullish reaction in the sterling as it limits the Monetary Policy Committee’s (MPC) scope to further support the real economy.

Risk: Bearish Argument/Scenario

Nevertheless, waning business confidence paired with fears of a slowing recovery may drag on consumer prices, and a dismal CPI report may produce headwinds for the British Pound as it puts increased pressure on the BoE to implement more non-standard measures.

How To Trade This Event Risk(Video)

Bullish GBP Trade: Headline & Core Inflation Tick Higher

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

Bearish GBP Trade: U.K. CPI Falls Short of Market Expectations

• 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

• GBP/USD may make a more meaningful attempt to break out of the triangle/wedge formation carried over from July as the pair appears to be coiling for another move above the Fibonacci overlap around 1.3300 (100% expansion) to 1.3370 (78.6% expansion); may see a bullish trigger in the Relative Strength Index (RSI) as the oscillator approaches trendline resistance.
• Key Resistance: 1.3870 (78.6% expansion) to 1.3900 (50% retracement)
• Key Support: 1.2450 (61.8% expansion) to 1.2500 pivot

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

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Impact that the U.K. Consumer Price Index (CPI) has had on GBP during the last release

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

GBP/USD 5-Minute

The U.K. Consumer Price Index (CPI) unexpectedly up ticked to an annualized 0.6% in July from 0.5% the month prior to mark the highest reading since November 2014, while the core rate of inflation slowed to 1.3% from 1.4% during the same period to mark the first decline since April. Even though the Bank of England (BoE) keeps the door open to further embark on its easing cycle, sticky price growth in the U.K. may encourage Governor Mark Carney to keep the benchmark interest rate above zero as the central bank sees a risk of overshooting the 2% inflation-target over the policy horizon. The British Pound tracked higher following the CPI print, with GBP/USD climbing above the 1.2950 zone to end the day at 1.3044.

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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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