5:30am NY Time UK CPI y/y Forecast 3.1% Previous 3.5%
ACTION: GBP/USD BUY 3.4% SELL 2.8%
We’ll be looking for a possible trade from the CPI year on year release out of UK today using a surprise factor (or deviation) of 0.3%. If the Inflation number increases to a surprise of 3.4%, which is way over BOE’s inflation target, we will BUY of GBP/USD. If the Inflation number decreases to 2.8% or less, we’ll look to SELL GBP/USD. Historically, even with a small difference of 0.1%, market tend to overreact. If our deviation is hit, there is a probability of over 80% that the market will move 50 pips within the next 30 minutes.
As it is the rule when CPI rises above 3.0% an automatic inflation letter is trigger from BOE Governor King to the Exchequer Darling explaining why inflation is above 3.0%. Therefore, if we do get a 3.4% or above CPI release, GBP may turn bullish as this inflation letter will send a message that MPC may be looking to adjust its monetary policy to curb inflation.
DEFINITION
“CPI, Consumer Price Index, is a statistical estimate of the movement of the prices of goods and services bought for consumption purposes by households. Its computation uses price data collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times and estimates of the shares of the different expenditures in the total covered by the index which are usually based upon expenditure data obtained for sampled periods from a sample of households Wikipedia).” It is also known as the “True Cost of Living”.
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