The Consumer Price Index, which measure the change in the cost of a basket of commonly purchased items, for the UK was released this morning at 9:30am London Time (GMT). The indicator has been trending higher for the past few months, and so according to the data, the UK does not have the same deflation which the Fed in the USA is trying so hard to get rid of by quantitative easing. So going into the news the number was expected to surprise to the upside, however most of the price action during the London Open was quite choppy and indecisive. The numbers were released and they were all a bit higher than expected, but not enough to trigger a spike trade according to the parameters we have successfully used in the past. Although recently the market has been very sensitive to news and there have been some good moves, this is not always the case, and especially on CPI data, when Interest Rates came down very low during the financial crisis, it was not reacting so well. This data comes out with 3 figures a monthly and yearly headline, and also a core year-on-year figure, which excludes the volatile food, energy, alcohol, and tobacco items. Generally to get a high probability trade on this news figure release all 3 numbers should deviate in the same direction, however the most important figure to watch is the headline y/y figure. Also the Retail Price Index is released at the same time, which is similar but includes only consumables and includes housing costs such as rent, again ideally this RPI would also deviate from the expected number in the same direction as the CPI, ie. + or - deviation, however it is not so important if it conflicts with CPI, as that is the big figure the market is really paying attention to. Here are the figures:
(UK) OCT CPI M/M: 0.3% V 0.2%E; Y/Y: 3.2% V 3.1%E; CORE CPI Y/Y: 2.7% V 2.6%E
- No revisions
(UK) OCT RPI M/M: 0.2% V 0.3%E; Y/Y: 4.5% V 4.6%E; RPIX Y/Y:4.6% V 4.6%
- No revisions
During the London session it did look like GBPUSD had bottomed and was ready to move higher, but there was no decent momentum, all this changed as soon as the news was release and the pair moved briskly up just over +30 pips. There was a small pullback of 10 pips, however with such a small deviation it was not enough for a good low-risk entry, and the price of GBPUSD did not even make a 38% pullback. It then headed another 20 pips higher to about 1.6088, for about a +45 pip move total. This level coincides with the 50% pullback of the move down on the GBPUSD forex pair since the start of the week, and the quick reversal off that level confirmed this as an important longer term fibonacci level (see the 2nd chart of this post-a 30 minute GBPUSD chart). Incidentally the central daily pivot was also at 1.6079, as well as the swing high during the asian session at 1.6081, thus creating a double top. Traders will often notice that price will come up or down to a previous swing high or low, break it by some pips (the amount of pips vary), and then turn around. This is the classic sweep out of stops, and perhaps to lure a fresh herd of breakout traders into the market to be squeezed. This subject could easily become the subject of a longer post. The GBPUSD continued down after this for a run of 100 pips. This is why it is important to be aware when the price maybe overreacting to a small deviation and not get so caught up in the short term volatility after the news release so as to forget the bigger picture fibonacci levels, trend, flows and sentiment.
As the price of GBPUSD moved down off this key 1.6088 50% fibonacci retracement level, we can see in the last chart how price reacted off the various fibonacci levels created by the swing during the news. There are many examples in previous posts of trading in the direction of the initial spike move of the news release after it has retraced, however generally a trader will want to do so within the first 5-10 minutes after the release. As time after the release passes, the probability of the classic news afterspike pullback trade diminishes. The chart shows how 10 minutes after release the 38% had a small bounce, again the 61% fibonacci retracement created another bounce some 16-17 minutes after release for 10 pips, and even the 78% caused a 12-15 pip bounce some 25 minutes after the release. Surely this could have confused any trader looking for a continuation of the initial spike move up, but with such a small deviation, once the trade had moved a few pips after the bounce off the fib level, stops should have been tightened. It highlights the importance of having a fast reliable source of market news, any trader simply watching price without knowing the actual numbers could have got caught by this. It simply was not the type of deviation of give the trade a big stop. Always remember to use tight stops on forex news afterspike trades! Even if a trader gets it wrong - 1 trade with a 30 pip stop equals the same as 3 trades with 10 pip stops. This is not the same for swing trading and other strategies but in fast moving news trading it is advisable.
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