If you’re planning on trading the pound this week, then the U.K. inflation updates are ones to watch for some potential volatility!
Let’s take a quick look at how the pound reacted to the report last month and see if we can explore trading strategies for this week’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?
The inflation picture was a mixed bag, but arguably net negative as consumer prices in the U.K. rose 1.0% in July y/y (improving on the 0.6% y/y read in June) while the headline rate of output inflation for U.K. goods leaving the factory gate was negative 0.9% on the year to July 2020. The house prices index for April also dipped, printing a -0.2% m/m read.
British pound pairs trended lower after the release, and given that there didn’t seem to be any additional external factors contributing to Sterling weakness, it’s possible the inflation data was the main driver for the move lower.
What’s expected this time?
This Wednesday at 6:00 am GMT, market players are expecting the annualized CPI growth to weaken to a 0.1% rate and the core CPI to slow to 0.8% y/y vs. the 1.8% y/y previous.
Producer prices output is expected to be negative once against, but at a slow pace of -0.7% y/y
Worse-than-expected numbers could add further pressure on the British pound, already reeling from the non-stop drama that the Brexit story has been bringing over the past few weeks.
Waiting for the actual event may be the most prudent entry strategy to consider given how Brexit headlines could pop up anytime to shake up Sterling. If lucky enough to have a quiet lead up to the event, consider a straddle trade strategy, i.e., waiting for a break of any range that may form before the event.
And given that it is a day where we’ll get the latest monetary policy statement from the Federal Reserve, consider adjusting/closing any open positions/orders before that major event as the Federal Reserve can have a big, big influence on global financial markets.