Pound signals reversal on rise in core CPI

On June 17th , we had recommended taking a long position in the GBPPLN currency pair at 5.50 with a target of 5.70. In a matter of one week, the GBP/PLN pair hit a high of 5.7460, before falling sharply to 5.1464.

Now, it seems that the downward momentum in the Pound has considerably decreased. The Bank of England, on the other hand, is expected to announce a rate cut soon.

The consolidation raises a question as to whether the cross will decline once again or take a U-turn. We can arrive at an answer by analysing the economic situation in the UK and Poland.

The analysts at Credit Agricole have clearly stated that the slowdown in the capital inflows and the political uncertainty will keep the Pound weak. The analysts, having said that, also warned that most of those negatives are already priced in and the downward momentum is likely to ease.

Reuters

The flurry of UK economic data announced on Tuesday indicates that the economy continues to perform well, even though the core issues still remain unresolved. The CPI (consumer price inflation) in June rose 0.5% on a y-o- y basis, compared to analysts’ expectation of a 0.4% increase. Similarly, in June, the PPI (producer price inflation) increased 1.8% m-o- m, against the market’s expectation of a 0.9% rise. The core CPI also registered a y-o- y rise to 1.4% in June. The analysts had anticipated the core CPI to increase 1.3% in June.

On the other hand, for the first-time since 2012, the Polish economy contracted 0.1% in the first-quarter of 2016. Likewise, the CPI declined 0.8% in June, on a y-o- y basis.

Thus, fundamentally, the GBP/PLN pair has fair chances of going up in the short term. The GBP/PLN is trading few notches above the major support zone between 4.96 and 5.12. Both the main and signal line of the stochastic indicator is in the oversold region, thereby indicating a high probability of a reversal. Thus, a currency trader can use the opportunity to take a long position in the GBP/PLN pair. As a word of caution, it should be remembered that the GBPPLN pair is on a long-term downtrend as indicated by the broken violet line.

Thus, to safeguard large capital erosion, a stop loss order can be placed below 4.90. The long position can be diluted at about 5.40.

Under the current scenario, trading a one touch call option should be the obvious choice of a binary trader. Out of the several target levels usually offered by a binary broker, a trader should select the one which is lower than or equal to 5.40. Furthermore, a four week time period should be allowed for the expiry of the contract.