Our focus today turns to UK Consumer Price Index (CPI), for any potential trades based on the data.
June 16, 9:30am BST
Office for National Statistics
UK Consumer Price Index measures the change in the price of goods and services purchased by consumers. It is the most important price-related release because it is the key measure the central bank uses to assess inflation. Consumer prices account for a majority of overall inflation. Inflation is important to currency valuation because each central bank has a target inflation range which they attempt to maintain, primarily by adjusting interest rates. A change in interest rates means a change in the yield an investor receives by investing in that currency.
The pound is the second most bullish currency at present, after the USD. Given the BOE’s plans to increase interest rates in the first half of 2016. The primary gauge of whether the BOE feels confident in raising rates is inflation, that is what makes this release of UK Consumer Price Index so important. In the recent reading we saw that for the annual period starting Q2-14 and ending Q1-15 the UK was in deflation, with a decrease in total CPI of 0.1%. Core CPI rose 0.8% for the same period. For this release, the median expectation for change in prices for the annual period ending May 31 is 0.1%. It means the economy is expected to exit deflation. A match or beat on this estimate will reinforce market expectations for inflation to trend higher and the BOE to raise rates within a year.
Expected Market Reaction:
Any deviation from the expected figures has the propensity to move pound significantly. The most desirable trade is to the upside as it will be in line with the pound’s bullish long term picture. A reading of 0.3% or above for the monthly figure will see GBP rally against all counterparts. Such a move may be sustained for several sessions, depending on other data outcomes. A miss of 0.1% or below for the monthly figure will see GBP sold off, for how long will depend on the deviation.
Take a look at my weekly Forex news events overview here in order to learn more about interpreting the upcoming UK Consumer Price Index data.
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