Monday, July 11, 2011

UK CPI (Consumer Price Index) y/y - July 12, 2011

We´ll be trading the UK Consumer Price Index (CPI) release at 4:30am NY Time today. We´ll be looking at the yearly release figure and the market could react with lots of volatility as CPI is the basic measurement of Inflation, therefore expect to see more exaggerated moves if we get a huge surprise release. 

Here is the forecast:


4:30am NY Time UK CPI y/y Forecast 4.5% Previous 4.5%
ACTION: GBP/USD BUY 4.8% SELL 4.2%


The Trade Plan


We are looking for a deviation of 0.3% to SELL and to BUY. If the Inflation number increases to 4.8%, which is way above BOE´s inflation target, we will BUY GBP/USD. If the Inflation number decreases to 4.2% or less, we´ll look to SELL GBP/USD. Historically, even with a slight difference of 0.1%, market usually overreacts. If our deviation is hit, there is a strong possibility that the market will move 50 pips immediately.

We´ll be looking to trade this release using my after-news retracement method. We´ll wait for the release, wait for market spike, and then wait for a decent retracement before jumping in.

The Market


With recent rise in commodities, utility companies are forced to raise prices, combining that with the speculation of global demand outpacing supply, plus the recent rise in VAT, it is possible that CPI in UK will reach the 5.0% level soon.

However, the fact that BOE has been keeping the short-term lending rate at 0.50% while inflation is at more than double of its target, market is now beginning to suspect that BOE will probably not hike rates no matter where the CPI is at… therefore, we may only see temporary demand for GBP on a higher than expected CPI release, but market will ultimately focus on other data such as Retail Sales, Employment, and GDP for more hints on BOE´s next monetary move.

Additional Thoughts


We will probably see the first wave of market reaction immediately after the release, then more reaction followed by the Inflation letter... (Governor King is expected to write a letter to the Chancellor of the Exchequer if CPI goes above 3% or below 1%.)

Pre-news Consideration

There is no pre-news trading for this release today.

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".

Thanks,