We’ll be trading the high impact UK Consumer Price Index release at 4:30am NY Time today. We’ll be looking at the yearly release figure and the market could react with lots of volatitility as CPI is the basic measurement of Inflation, therefore expect to see more exaggerated moves if we get a huge surprise in the release. Here is the consensus for this release:
4:30am NY Time UK CPI y/y Forecast 3.5% Previous 3.4%
ACTION: GBP/USD BUY 3.8% SELL 3.2%
We are looking a surprise factor (or deviation) of 0.3%. If the Inflation number increases to of 3.8%, which above BOE’s inflation target, we will BUY of GBP/USD. If the Inflation number decreases to 3.2% or less, we’ll look to SELL GBP/USD. Historically, even with a slight difference of 0.1%, market usually overreact. If our deviation is hit, there is a strong possibility that the market will move 50 pips immediately.
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 3.8% 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 soon. However, considering the current market sentiment, I’d caution any long term trade on GBP, therefore use a small take profit target and get in and out of the market as soon as possible.
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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Welcome back henry liu!