Forex Quebec

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 volatility as CPI is the basic measurement of Inflation, therefore expect to see more exaggerated moves if we get a huge surprise release. Here is the forecast:

4:30am NY Time UK CPI y/y Forecast 4.8% Previous 5.0%
ACTION: GBP/USD BUY 4.5% SELL 5.1%

The Trade Plan

We are looking for a variable deviation of 0.2~0.3%. If the Inflation number increases to 5.1%, which is even higher than last months and definitely above BOE´s inflation target, we will BUY GBP/USD. If the Inflation number decreases to 4.5% 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.

We´ll be looking to trade this release using my after-news retracement method. We´ll wait for the release, wait for market spike, and then wait for a decent retracement before jumping in.

The Market

With BOE re-starting stimulus program and the fact that its policy is shifting towards easing, inflation is likely to remain resilient, at least for the time being.  However, during the last inflation report BOE stated that inflation should fall below the bank’s 2 ~ 3% target by 2012, therefore if we see significant drops in today’s CPI, market could be bearish on the currency front but bullish on the economy, and we should wait for a decent retracement before jumping into a trade.

Additional Thoughts

We will probably see the first wave of market reaction immediately after the release, then more reaction followed by the Inflation letter… (Governor King is expected to write a letter to the Chancellor of the Exchequer if CPI goes above 3% or below 1%.)

Pre-news Consideration

There is no pre-news trading for this release today.

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”.

Provided by Henry Liu