GBP/USD: Trading the British CPI May 2014

British  CPI, which  is released each quarter, is an inflation index which measures the change in the price of goods and services charged to consumers. A reading which is higher than the market forecast is bullish for the pound.

Here are all the details, and 5 possible outcomes for GBP/USD.

Published on Tuesday at 8:30 GMT.

Indicator Background

Analysts consider CPI one of the most important economic indicators, and the release of the  British CPI can affect the direction of GBP/USD.  The  level of  inflation is an important component in  any decision by the BOE to raise interest rates, which would affect the movement of GBP/USD.

CPI   continues to fall and dropped to 1.6% in Q1, matching the estimate.  Little change is expected in Q2, with the estimate standing at 1.7%.

Sentiments and levels

After coming within a whisker of the 1.70 level, the pound has not looked strong against the dollar.  A hike in interest rate levels by the BOE would be bullish for the pound, but the Bank has done its best to dampen speculation about a rate hike.   In the US, key indicators continue to point upwards, and the Fed is likely to continue trimming QE, which is a vote of confidence in the health of the US economy.  Thus, the overall sentiment is bullish on GBP/USD towards this release.

Technical levels, from top to bottom: 1.7375, 1.7180, 1.6990, 1.6823, 1.6705, and 1.66.

5 Scenarios

1. Within expectations: 1.3% to 1.9%. In this scenario, GBP/USD could show some slight fluctuation, but it is likely to remain within range, without breaking any levels.
2. Above expectations: 2.0% to 2.3%: A stronger reading than predicted could push the pair above one resistance line.
3. Well above expectations: Above 2.3%: An unexpectedly sharp rise could push GBP/USD upwards, with a second line of resistance at risk.
4. Below expectations: 0.9% to 1.2%: A lower than expected reading could pull the pair downwards, with one support level at risk.
5. Well below expectations: Below 0.9%:  In this scenario,  the pair could break below a second  support level.

For more on the pound, see the GBP/USD forecast.

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