How to trade the UK inflation report

5 June 2016, 14:07
Sherif Hasan
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These types of events happen regularly but this week we have a very interesting scenario occurring because most analysts expect the Bank to upgrade its economic assessment of the UK economy and realign their targets for raising interest rates.

This essentially means that they may look at raising rates a little sooner than they have previously expected and any sign that they are looking at possibly doing this sooner is sure to cause major rallies on the British pound.

Higher interest rates mean better returns for investors and this usually means a large inflow of capital from around the globe as traders, funds and investors seek to take advantage of the extra yields available.

The key element to this is that recent data from the UK has been absolutely fantastic, which gives added strength to the notion that the Bank of England may indeed be forced to reassess their stance on the economy and the triggers for raising rates. One such trigger is unemployment and it has been stated that if the rate reaches 7% or below, this is a reason to increase rates early.

With all of this in mind it is going to be a very interesting and volatile day on Wednesday with the pound set for large gains should everything play out as expected. If you want to take advantage of this scenario, then the best play is to start building in long positions on the GBP/USD pair with stop losses below recent technical lows.

If you prefer a more conservative approach then you could wait until after the report and see whether or not the expectations were realised. You will of course miss the initial spike, but there will be other, smaller trading opportunities to take advantage of as the price pulls back during the days following the event.

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