If you’re planning on trading the pound this week, then the U.K. CPI release is your first opportunity to catch some volatility! Let’s take a quick look at how the pound has reacted to the report last month and see if we can explore trading strategies for tomorrow’s event.
Why is this report important?
Inflation reports are a huge deal for central banks since monetary policy decisions are made primarily to maintain price stability. Rising price levels, as indicated by the headline and core consumer price index (CPI), could convince the Bank of England (BOE) to raise interest rates while falling CPI readings could force them to consider monetary policy easing.
The U.K. typically dumps its inflation-related reports in one go, giving market watchers a better picture of the overall price levels.
The producer price index (PPI) 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?
Consumer prices in the U.K. popped up by 0.3% from a year earlier in February, the same as January’s growth rate and slower than the expected 0.4% uptick.
A closer look reveals that cheaper bicycles and second-hand cars had offset some of the impact of higher wages and oil and import prices. Meanwhile, core prices, which excludes volatile items such as oil and food, remained steady at 1.2%.
Much like in the previous releases, major pound pairs like GBP/USD and GBP/JPY traded in tight ranges before the event. Unlike in the previous months, though, the breakout wasn’t caused by the inflation readings. Instead, explosions in Brussels sent high-yielding currencies like the pound lower across the board even before the inflation reports were printed.
The actual release didn’t get as much reaction as in the previous months, but that could have played a part in the extension of Cable and Guppy’s losses during the U.S. session.
What’s expected this time?
Tomorrow at 8:30 am GMT, market players are expecting the annualized CPI growth to remain steady at 0.3% and the core CPI to keep its 1.2% pace in March.
Worse-than-expected numbers could persuade Mark Carney and his gang to further delay their rate hike plans while strong readings could convince investors not to worry that the slow wage growth is weighing on consumer spending (which makes up a huge chunk of the U.K.’s GDP).
Look out for pound pairs exhibiting 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.
Waiting for the actual event might be better than a straddle trade idea in this case, as pound pairs usually have a direct correlation with the report. Also, look for subdued extensions or retracements during the U.S. session with your exit triggers ready in case another catalyst comes along to change the pound’s direction.