The U.K. CPI release is one of my favorite reports to trade since the pound’s forex reaction has been pretty consistent. But before we get to the part about catching pips, let’s see what the event is all about and what your fellow market watchers are expecting.
Why is this report important?
Inflation reports are a huge deal for central bank officials since monetary policy adjustments are made primarily to maintain price stability. Rising consumer price levels, as indicated by the headline and core CPI, could convince the folks over at Threadneedle Street to move closer to hiking interest rates while falling CPI readings could force them to sit on their hands or consider monetary policy easing.
The U.K. typically dumps most of its inflation-related reports in one go, giving forex market watchers a better picture of how overall price levels are faring. The PPI or producer price index shows changes in raw materials and input prices, making it a leading indicator of consumer inflation. The RPI (retail price index) and HPI (house price index) also provide clues on inflation trends.
What happened last time?
The U.K. printed mixed results for its January inflation figures, with the headline CPI and the PPI output reading coming in line with expectations and the rest falling short. In particular, the core CPI fell from 1.4% to 1.2%, worse than the estimated drop to 1.3%. Components of the report revealed that fuel prices were still down and that most of the price gains were simply driven by higher costs of alcohol and tobacco.
With that, the pound had a bearish forex reaction to the report, falling by more than a couple hundred pips against the U.S. dollar and by roughly 300 pips to the Japanese yen.
As you can see from these charts during the day of the U.K. CPI release, the pairs typically consolidate in a tight box during the Asian session before making breakouts ahead of the reports.
Still, it’s worth noting that the pound pairs established a clear direction only after the actual numbers were printed and that the move lasted for a number of hours until almost the end of the U.S. session.
What’s expected this time?
For the month of February, analysts are expecting to see a rise in the headline CPI from 0.3% to 0.4% while the core reading is projected to hold steady at 1.2%. Producer input prices could see a 0.4% rebound while output prices could show a flat reading.
Stronger than expected results could allow the pound to advance against most of its forex peers while weaker than expected data could spur a selloff, as the latter scenario could continue to dampen rate hike expectations. Recall that the BOE mentioned that they’re in no mood to adjust monetary policy in the next few months since they’re counting on government fiscal measures to keep the economy supported.
In any case, pound pairs could exhibit a similar pattern during the day of the release, with tight consolidation taking place early on and volatility picking up hours before the actual report is due. Because of that, I’m not too keen about setting straddle orders ahead of the event because these long or short orders could get triggered before the pairs establish a clear direction. It might be best to wait to get your hands on the CPI readings and waiting to enter positions outside the Asian box since the reaction has enough follow-through anyway.