GBP/USD: Trading the British CPI Jan 2015

British  CPI, released each month,  is the primary gauge of consumer inflation. A reading which is higher than the market forecast is bullish for the pound.

Update:  UK inflation plunges to 0.5% – GBP/USD follows

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

Published on Tuesday at 9:30 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.

Inflation in the UK continues to drop, and  CPI has now softened for five consecutive months. The index dropped to 1.0%, shy of the estimate of  1.2%. The downward trend is expected to continue, with an estimate of just 0.7% for December.

Sentiments and levels

The health of the UK economy continues to raise concerns, as British Construction and Services PMIs softened in December. There  was some good news  from the manufacturing front, as Manufacturing Production bounced back with a strong gain.  In the US, employment data was solid, as Nonfarm Payrolls was higher than expected, and the unemployment rate fell to 5.6%. The British economy has slowed down, hurt by weak global demand and a sluggish Europe. Dropping inflation rates mean that the BOE may postpone a raise in interest rates,  as opposed to the US, where the Fed is mulling when to raise rates.  Thus, the overall sentiment is bearish on GBP/USD towards this release.

Technical levels, from top to bottom: 1.5539, 1.5416, 1.5290, 1.5114, 1.5008, and 1.4813.

5 Scenarios

1. Within expectations: 0.4% to 1.0%. 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: 1.1% to 1.5%: A stronger reading than predicted could push the pair above one resistance line.
3. Well above expectations: Above 1.5%: An unexpectedly sharp rise could push GBP/USD upwards, with a second line of resistance at risk.
4. Below expectations: -0.1% to 0.3%: A lower than expected reading could pull the pair downwards, with one support level at risk.
5. Well below expectations: Below -0.2%:  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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