May 21, 2012

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 3.1% Previous 3.5%
DEVIATION: 0.3% (BUY GBP 3.5% / SELL GBP 2.8%

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”.

The Trade PlanWe are looking for a variable deviation of 0.3%. If the Inflation number remained above 3.5%, which is beyond BOE´s inflation target, we will BUY GBP. If the Inflation number decreases to 2.8% or less, we´ll look to SELL GBP. 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.

Primary currency pair: GBP/USD ; EUR/GBP ; GBP/JPY
Forecast: 3.1
Previous: 3.5
LT1 (Lower Trigger 1): --- [SELL]
UT1 (Upper Trigger 1): --- [BUY]

For UK CPI y/y: based on 30 estimates, median estimate is 3.1% and the average estimate is 3.1%. The highest estimate is 3.4% (one estimate) then 3.3% (four estimates). The lowest estimate is 2.7% (two estimatea) and then at 2.8 and 2.9% (one estimate each). One standard deviation is +/- 0.2%.

Unfortunately, we haven't seen any deviations on this report for a few months in a row so it's hard to estimate what triggers would work and what triggers wouldn't. I think +/- 0.3 deviation may be worthy to give a try but very fast retracement may also happen. I would personally stay away from this report until I see it performing again.

+/- 0.3 deviation happened a few times in the past but of course chances for a trade are a bit low.

Last month it came out at 3.5 vs 3.4 expected, and we didn't see a spike.

Two months ago it almost came as expected so it was a no trade.

Then in next three months in a row it came out exactly as expected so it was a no trade.

Six months ago we had deviations of 0.1 and really no price action.

Seven months ago UK CPI y/y came out at 5.2 vs 4.9 expected but we saw only about 30 pip spike. Nothing special but not a losing trade either.

Eight months ago both CPI m/m and y/y came out as expected so it was a no trade.

Nine months ago we had just +0.1 deviation on both UK CPI y/y and m/m, and we saw about 25 pip spike with GBP/USD eventually going higher and higher. Not bad price action but it was a no trade anyway.

Ten months ago UK CPI y/y came out at 4.2 vs 4.5 expected ( -0.3 deviation), and CPI m/m came out at -0.1 vs +0.2 expected (also -0.3 deviation), and GBP/USD spiked down by over 60 pips. However, we shortly saw about 50% retracement, and within 30 minutes GBP/USD was back to the prerelease price.

Eleven months ago it came out exactly as expected so it was a no trade.

Twelve months ago CPI y/y came out at 4.5 vs 4.1 expected (+0.4 deviation), and CPI m/m came out at +1.0 vs 0.7 expected (+0.3 deviation), and we saw about 50 pip move on GBP/USD.

Thirteen months ago UK CPI y/y came out at 4.0 vs.

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