Some Pound Action on the Cards Today? Watch out for the UK CPI Numbers! – April 11th Morning Brief
Eric Furstenberg • 4 min read
Without a doubt, the United Kingdom’s consumer price index reading is the most important economic data on today's docket. Certainly, the European ZEW Economic Sentiment number and the JOLTs Job Openings number out of the U.S. are important as well, but not nearly as important as this gauge of the UK’s inflation.
The UK has recently seen a notable increase in consumer prices. In a really short time, their CPI number, which is their official method of measuring inflation, has bounced from a lowly 0.9% in November last year, to an impressive 2.3% in March this year.
What would have caused this sharp rise in inflation? Isn’t the Brexit ordeal supposed to put tremendous pressure on the British economy? It should be negative for the UK after all, yes. And of course, it has already impacted the region in certain ways. However, the British pound has lost so much of its value during the last few years, that a bounce in UK inflation is absolutely inevitable. A currency devaluation doesn’t always lead to an increase of that country’s inflation, but the current condition of the UK economy certainly supports it. Since June 2014, the pound lost about 27.6% of its value against the dollar. Much of this decline has been a ‘pricing in’ of the Brexit, of course. Perhaps I should say, the uncertainty about the matter weakened the pound significantly (after all, the world didn’t really believe that the Britons would vote to leave the European Union). And let us not forget about the treacherous day itself, when the pound lost more than 1100 pips against the dollar, and 1800 against the Japanese yen. Of course, the pound didn’t only lose value against the dollar and the yen – it was a broad weakening of the pound against the forex market as a whole.
To get back to the inflation matter and how it relates to the FX market, let’s briefly examine what happens when inflation rises too much.
The Bank of England’s inflation target is two percent. When it anticipates that inflation could get out of control in the near future, it needs to counter it by raising its interest rate. When interest rates increase, spending is reduced and people tend to save more since there is more incentive to earn the higher interest rate. These actions counteract the problem of excessive inflation. Of course, there are other factors which need to be brought into consideration before raising interest rates, which include wage growth, the unemployment rate, and the condition of the economy, just to name a few. Nevertheless, inflation is an important factor which influences central bankers’ interest rate decisions.
One effect of a higher interest rate in the UK would probably be a flow of funds into the pound. This is what we need to be aware of. When inflation rises, the involved country’s currency normally appreciates because of the prospects of higher interest rates. Much of the pound's recent support is because of the recent uptick in the UK's inflation. Now before we get too technical, let’s have a look at a few charts:
GBP/USD Daily Chart
As you can see, the GBP/USD has been stuck in this large range for about six months. Luckily this range isn’t too tight, so at least we had some opportunities to make a few dollars here and there.
If we look at yesterday’s candle (Monday), we can see that the price bumped into the 20-EMA, but struck some resistance right at it. Let me zoom in a bit so you can see it more clearly:
GBP/USD Daily Chart
I like this setup for a short play because of this former support zone which could easily hold as new resistance. What also matters to me, is that we’ve already seen some price rejection off of this level, which is also where we find the 20-EMA. Remember, the 20-EMA often acts as dynamic support or resistance. In this case, it looks like it could hold as an important level of resistance. By the way, just look at how the 20-EMA has held as dynamic support during the last two weeks. What we’re looking for now, is a reversal of this role, seeing that the price has made a strong break below this moving average on Friday.
To consider the fundamental factors which could affect the pound; the Brexit matter is, of course, an important theme we need to keep an eye on as we trade this major currency. If investors get scared again for some reason, it could work in our favor if we’re in a short play on the pound. The other factor, as I mentioned, is the CPI release which is scheduled for 08:30 GMT today. Be careful here. A really good print could be bad for a short position. On the other hand, if we see a miss of the expected 2.3% reading, the pound could shed a substantial number of pips, especially if it’s a big miss.
Notes On Other Instruments
Gold – Watch out for that Pinbar!
If you’re trading gold on the long side, I hope you saw the red lights flashing on the daily chart. There is a dangerous shooting star candlestick which suggests that this instrument could correct lower soon. The other concern is the bearish divergence of the RSI indicator which has formed in the last few days. I’m not saying you should sell gold at the moment, but if you’re bullish on gold you need to be careful and manage your risk wisely. Look at this daily chart:
Gold Daily Chart
AUD/USD – Strong Push Lower
The AUD/USD is a pair worth mentioning. It has made a decent move lower in the last couple of days. Now in the light of the quiet trading conditions we’ve encountered right across the FX market lately, this pair could possibly provide us with some splendid selling opportunities today, and in the days and weeks ahead. Just a word of caution, though – don’t be too hasty here, the pair is relatively oversold at the moment. It might be better to wait for a retracement in order to enter at a better price. Here is a daily chart of the pair:
AUD/USD Daily Chart
I might be wrong, and I hope I’m wrong, but I think today and the rest of this week won’t offer a tremendous amount of market volatility. As you may know, we have a short week ahead of us, with Friday being a holiday in most of the major financial centers around the world. Of course, Monday is also a holiday, which makes this quite a long weekend.
Best of luck with your trading!