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The  British CPI (Consumer Price Index), released monthly, measures the change in the price of goods and services charged to consumers.  A reading which  is higher than the market is bullish for the pound.

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

Published on Tuesday at  9:30 GMT.

Indicator Background

The Consumer Price Index is considered the main and most important inflation indicator. The index  is important  for currency traders, since if the index rises, for example,  the central bank will be inclined to raise interest rates in order to keep inflation under control. In turn, higher interest rates make the pound  more attractive to investors. Conversely, lower inflation may lead to lower interest rates to boost economic activity.

The CPI  has  dropped for three  consecutive readings, and was down to 4.2%  for the  January reading. The markets are calling for a further drop in inflation,  predicting a reading of 3.6%.  Will the CPI continue its downward trend?

Sentiments and levels

The pound has had an excellent 2012 and has performed well against the dollar. Industrial and manufacturing production exceeded market forecasts, indicating some improvement in the UK economy. Thus, the overall sentiment is bullish on GBP/USD towards this release.

Technical levels, from top to bottom: 1.60, 1.59, 1.5780, 1.5730, 1.5706,  1.5670,  1.5629 and 1.5520.

5 Scenarios

Within expectations: 3.3% to 3.9%. In this scenario, GBP/USD could show some slight fluctuation, but it is likely to remain within range,  without breaking any levels.

Above expectations: 4.0% to 4.3%: A reading inicating higher inflation than expected  could  push the pair  above one  resistance level.

Well above expectations: Above 4.2%: An unexpectedly sharp rise in inflation would likely trigger higher interest rates, pushing GBP/USD upwards, and possibly breaking two or more lines of resistance.

Below expectations: 2.9% to 3.2%: A lower than expected reading could pull the pair downwards, with one support level at risk.

Well below expectations: Below 2.9%: Such a reading  could  push GBP/USD downwards, and the  pair could break two  or more support  levels.

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