The UK’s CPIs and Its Effects on The GBP/USD

The UK’s CPIs and Its Effects on The GBP/USD

Talking about the monthly figures, the CPI could drop to -0.6% from +0.4%. The headline CPI inflation is expected to slip from 1.0% before 0.0% on an annual basis. The Core CPI that excludes volatile food and energy items can also follow the suit with market forecasts suggesting 0.6% YoY print versus 1.8% previous readouts.

Talking about the monthly figures, the CPI could drop to -0.6% from +0.4%. The headline CPI inflation is expected to slip from 1.0% before 0.0% on an annual basis. The Core CPI that excludes volatile food and energy items can also follow the suit with market forecasts suggesting 0.6% YoY print versus 1.8% previous readouts.

The key inflation data will pave the way for market forecasts concerning the “Super Thursday” and will, hence, become even more important. However, the current Brexit drama and the pre-Fed trading lull may dim the charm of the crucial economic releases.

 

The cost of living in the UK for August UK as represented by the Consumer Price Index (CPI) is due early on Wednesday at 06:00 GMT (Greenwich Mean Time).

 

The UK inflation is set to fall sharply in August due to several downside forces, including the VAT cut on the hospitality industry in late-July, the discounting from the Eat Out to Help Out scheme, and a failure of clothing/footwear prices to rebound due to the lack of discounting in July. The error bands are especially wide on determining how much of the VAT cut ultimately passed through to consumers, but we estimate that core CPI slipped to 0.4% y/y (market forecast 0.5%), which would be its lowest print since 2001. That should push headline CPI down to about -0.1% y/y (expected 0.0%), just into negative territory. 

The initial market reaction is likely to remain confined between 15 and 80 pips in deviations up to 2 to -3. The same suggests the importance of the key inflation data for GBP/USD pair traders.

How could it affect GBP/USD?

GBP/USD stays mildly bid while piercing 1.2900. In doing so, the pair prints a three-day winning streak, while extending pullback from a seven-week low flashed on Friday. The press time of pre-London is open on Wednesday.

Favoring the GBP/USD buyers are speculations, as conveyed by Reuters, UK Express, and Telegraph, concerning the British push to break the Brexit deadlock while easing stance on fisheries, and also the pair has mainly cheered the US dollar weakness as the DXY fails to keep the previous day’s recovery moves and attacks 93.00 by the press time. It should also be noted that recently neutral statements from the Bank of England (BOE) policymakers also keep the pair’s buyers hopeful ahead of tomorrow’s key monetary policy meeting and Quarterly Inflation Report (QIR). Technically, the pair’s sustained trading beyond the 200-day EMA level of 1.2753 enables the bulls to target the 50-day EMA, currently around 1.2965. And yet, the August month’s low near 1.2980 and the 1.3000 thresholds can question the pair’s further upside.

As a result, today’s inflation data becomes the key and hence any surprise positive outcome can strengthen the pair while the actual readings near the expected downbeat figures may print short-term declines of the quote.

 

About the UK CPIs

The Office for National Statistics releases the Consumer Price as a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services.

The purchasing power of the GBP is dragged down because of inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish). There are tons of changes in this year’s market due to the pandemic and the Brexit happening.

 

Economic Calendar Highlights

 

  • EUR: CPI (YoY) (Aug): 7:00am

The Consumer Price Index (CPI) measures the change in the price of goods and services from the perspective of the consumer. It is a key way to measure changes in purchasing trends and inflation.

 

A higher than expected reading should be taken as positive/bullish for the GBP, while a lower than expected reading should be taken as negative/bearish for the GBP.

 

  • U.S. Core Retail Sales MoM: 1:30pm

Core Retail Sales measures the change in the total value of sales at the retail level in the U.S., excluding automobiles. It is an important indicator of consumer spending and is also considered as a pace indicator for the U.S. economy.

 

A higher than expected reading should be taken as positive/bullish for the USD, while a lower than expected reading should be taken as negative/bearish for the USD.

 

  • U.S. Retail Sales MoM (Aug): 1:30pm

Retail Sales measure the change in the total value of sales at the retail level. It is the foremost indicator of consumer spending, which accounts for the majority of overall economic activity.

 

A higher than expected reading should be taken as positive/bullish for the USD, while a lower than expected reading should be taken as negative/bearish for the USD.

 

  • U.S. Crude Oil Inventories: 3:30pm

The Energy Information Administration's (EIA) Crude Oil Inventories measures the weekly change in the number of barrels of commercial crude oil held by US firms. The level of inventories influences the price of petroleum products, which can have an impact on inflation.

 

If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices. The same can be said if a decline in inventories is less than expected.

If the increase in crude is less than expected, it implies greater demand and is bullish for crude prices. The same can be said if a decline in inventories is more than expected.

 

  • U.S. FOMC Economic Projections: 7:00pm

This report includes the Federal Open Market Committee's (FOMC) projection for inflation and economic growth over the next 2 years. An important part of the report is the breakdown of individual FOMC members' interest rate forecasts.

 

  • U.S. FOMC Statement: 7:00pm

The U.S. Federal Reserve's Federal Open Market Committee (FOMC) statement is the primary tool the panel uses to communicate with investors about monetary policy. It contains the outcome of the vote on interest rates, discusses the economic outlook and offers clues on the outcome of future votes.

 

A more dovish than expected statement could be taken as negative/bearish for the USD, while a more hawkish than expected statement could be taken as positive/bullish for the USD.

 

  • U.S. Fed Interest Rate Decision: 7:00pm 

Federal Open Market Committee (FOMC) members vote on where to set the rate. Traders watch interest rate changes closely as short term interest rates are the primary factor in currency valuation.

A higher than expected rate is positive/bullish for the USD, while a lower than expected rate is negative/bearish for the USD.

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