Henry Liu
Former FPA Special Consultant
- Messages
- 473
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 volatilities 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 forecast for this release:
4:30am NY Time UK CPI y/y Forecast 3.2% Previous 3.4%
ACTION: GBP/USD BUY 3.6% SELL 2.9%
The Basic Plan
We are looking for a safe deviation of 0.3% for SELL and 0.4% for BUY. If the Inflation number increases to of 3.6%, which is way above BOE’s inflation target, we will BUY of GBP/USD. If the Inflation number decreases to 2.9% 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.
The Market
UK's sovereign credit rating of AAA has been placed on a negative outlook by S&P today as the credit rating agency expressed concerns over the growth outlook of UK's economy of which the current fiscal spending plan is based on. There is a strong possibility UK may lose it's credit rating with S&P, although both Moody's and Fitch maintained UK's AAA rating with stable outlook.
The momentum of GBP against USD, JPY, and EUR has reached an area of equilibrium as we can see in the tight trading range in the last few days. It is very likely we will see consolidation and possible reversal as market may be prepared to sell off GBP on both technical and fundamental reasons.
More Thoughts
With CPI expected to level off towards the end of 2010, there is a general consensus that it may begin with this CPI release. However, it is important to understand that CPI, or inflation, moves the market because central banks use interest rates to control inflation. By raising interest rate, economy will be choked, thus inflationary pressure will fall. In today's market, inflation no longer serves the same purpose as central banks do not raise rates on inflation alone. This makes today's CPI like a weird uncle that your parents never want to talk about. If we get a stronger CPI release, there will be no expectation for rate hikes anytime soon, especially when the new adminstration in UK is planning to cut spending and deal with debt crisis head on... Therefore, judging from the market and the current sentiment, I'd be very careful when taking a BUY trade on GBP. On the other hand, if we get a weak release on CPI, market could move down significantly.
One last thought, depending on the release, as long as it is not a huge surprise to the upside, you could SELL from the top after the news effect is over, which should be about 2~3 hours. I think the general sentiment of uncertainty surrounding GBP should continue throughout the week.
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”.
To read my trading strategy, click below:
Henry's News Trading Strategy
For previous releases data of UK CPI and historical charts, click below:
UK CPI Historical Data & Charts
To see the actual charts, make sure you click on the "File Box" next to the news item on the right hand side. Historical chart should pop up in a new window.
Thanks,
4:30am NY Time UK CPI y/y Forecast 3.2% Previous 3.4%
ACTION: GBP/USD BUY 3.6% SELL 2.9%
The Basic Plan
We are looking for a safe deviation of 0.3% for SELL and 0.4% for BUY. If the Inflation number increases to of 3.6%, which is way above BOE’s inflation target, we will BUY of GBP/USD. If the Inflation number decreases to 2.9% 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.
The Market
UK's sovereign credit rating of AAA has been placed on a negative outlook by S&P today as the credit rating agency expressed concerns over the growth outlook of UK's economy of which the current fiscal spending plan is based on. There is a strong possibility UK may lose it's credit rating with S&P, although both Moody's and Fitch maintained UK's AAA rating with stable outlook.
The momentum of GBP against USD, JPY, and EUR has reached an area of equilibrium as we can see in the tight trading range in the last few days. It is very likely we will see consolidation and possible reversal as market may be prepared to sell off GBP on both technical and fundamental reasons.
More Thoughts
With CPI expected to level off towards the end of 2010, there is a general consensus that it may begin with this CPI release. However, it is important to understand that CPI, or inflation, moves the market because central banks use interest rates to control inflation. By raising interest rate, economy will be choked, thus inflationary pressure will fall. In today's market, inflation no longer serves the same purpose as central banks do not raise rates on inflation alone. This makes today's CPI like a weird uncle that your parents never want to talk about. If we get a stronger CPI release, there will be no expectation for rate hikes anytime soon, especially when the new adminstration in UK is planning to cut spending and deal with debt crisis head on... Therefore, judging from the market and the current sentiment, I'd be very careful when taking a BUY trade on GBP. On the other hand, if we get a weak release on CPI, market could move down significantly.
One last thought, depending on the release, as long as it is not a huge surprise to the upside, you could SELL from the top after the news effect is over, which should be about 2~3 hours. I think the general sentiment of uncertainty surrounding GBP should continue throughout the week.
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”.
To read my trading strategy, click below:
Henry's News Trading Strategy
For previous releases data of UK CPI and historical charts, click below:
UK CPI Historical Data & Charts
To see the actual charts, make sure you click on the "File Box" next to the news item on the right hand side. Historical chart should pop up in a new window.
Thanks,
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