The UK economy is set to release its annual consumer price index (CPI) for February in today’s London trading session. After printing a weaker than expected 1.9% reading for January, the inflation report could show a lower 1.7% increase in price levels this time.
This would mark the fifth consecutive month that the CPI reading has missed expectations. It would also mean that the annual inflation figure is far below the BOE’s (Bank of England) 2% CPI target. In this case, policymakers would be less likely to push for tightening measures as the central bank and the UK government are keen on maintaining price stability.
On its 4-hour time frame, GBP/USD is currently consolidating around the 1.6500 major psychological level. Traders are sitting tight ahead of the CPI release today, which would be crucial in setting the tone for monetary policy biases.
A stronger than expected reading might trigger a quick bounce but the rally might be short lived if the results still fall below the 2% mark. On the other hand, a weaker than expected CPI might lead to a strong downside break, as this would convince most market watchers that the BOE isn’t as close to hiking interest rates or ending asset purchases as previously believed.
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A quick look at the previous reaction to the weaker than expected CPI release back in February 18 shows a quick 50-pip selloff for the GBP/USD pair down to the next visible support zone near the 1.6600 major psychological level. The drop was not sustained as risk appetite surged in the succeeding trading sessions.
If the actual CPI reading comes in stronger than expected, GBP/USD might make a rally up to the 1.6600 area of interest, as the pair is currently finding support at the 61.8% Fibonacci retracement level on the latest swing high and low.
Prepared by Aayush Jindal, Chief Technical Strategist at Capital Trust Markets
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