GBP/USD Bullish RSI Momentum Vulnerable to Slowing U.K. CPI

- U.K. Consumer Price Index (CPI) to Slip to 1.2%- Lowest Reading for 2014.

- Core Rate of Inflation to Hold at Annualized 1.5% for Third Straight Month.

Trading the News: U.K. Consumer Price Index

A downtick in the U.K.’s Consumer Price Index (CPI) may spur a bearish reaction in GBP/USD as slowing inflation undermines the Bank of England’s (BoE) scope to normalize monetary policy.

What’s Expected:

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Why Is This Event Important:

Nevertheless, BoE Governor Mark Carney may continue to prepare U.K. households and businesses for higher borrowing costs amid the stickiness in core inflation, and the Monetary Policy Committee (MPC) may adopt a more hawkish tone over the coming months as the central bank anticipates a faster recovery in 2015.

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Expectations: Bearish Argument/Scenario

Easing home prices paired with lower input costs may continue to drag on the headline reading for inflation, and a dismal CPI print may spark a test of the monthly low (1.5540) as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

However, U.K. firms may boost consumer prices amid the uptick in wage growth along with the pickup in private-sector consumption, and a stronger-than-expected reading may spur a more meaningful rebound in GBP/USD as it puts increased pressure on the BoE to implement a rate hike in the year ahead.

How To Trade This Event Risk(Video)

Bearish GBP Trade: U.K. CPI Narrows to 1.2% or Lower

• 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 Highlights Sticky Inflation

• 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:

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Potential Price Targets For The Release

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

• Lack of momentum to retain the bullish RSI trend may generate a further decline in GBP/USD.
• Interim Resistance: 1.5890 (61.8% retracement) to 1.5910 (50% expansion)
• Interim Support: 1.5540 (61.8% expansion) to 1.5550 (78.6% retracement)

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

October 2014 U.K. Consumer Price Index

The U.K.’s Consumer Price Index (CPI) unexpectedly rebounded from a five-year low of 1.2% to 1.3% in October, while the core inflation remained unchanged at an annualized rate of 1.5% from the month prior. However, the Bank of England (BoE) may overlook the minor uptick in the headline reading for U.K. inflation as the central bank anticipates price growth to fall to 1% over the near to medium-term, and it seems as though the Monetary Policy Committee (MPC) will carry its wait-and-see approach into 2015 as the majority remains in no rush to lift the benchmark interest rate off of the record-low. Despite the better-than-expected print, there was limited follow-though behind the initial reaction as GBP/USD was largely capped around 1.5670, but the sterling struggled to hold its ground during the North American trade as the pair ended the day at 1.5606.

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

To contact David, e-mail [email protected]. Follow me on Twitter at @DavidJSong.

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