Trading the News: UK Producer Price Index - Core Output

[B]What is Expected[/B]
Time of release: [B]4:30 EST, 8:30 GMT 7/9/2007[/B]
Primary Pair Impact : [B]GBP/USD[/B]
Expected: 2.7%
Previous: 2.4%

[B]How To Trade This?[/B]
Over the past few months, inflation has been a key topic for those in the British pound circles. The fireworks began with the March PPI numbers released back in April. A jump in core factory-level inflation preceded a similar bounce in the CPI and RPI gauges for the same period a few days later. This in turn got the ball rolling on the inevitable May interest rate hike which seemed more and more certain as each day passed. While the market isn?t projecting a surge in upstream price pressures for the June number that would compete with the March high, it is nevertheless expected to accelerate to a concerning 2.7 percent annual pace. With the BoE just coming off another 25 basis point hike, accompanied by a persistently hawkish statement, any sign of persistent inflation could influence a sensitive market.
The reaction to this producer price index will be somewhat mixed. Coming so soon after a rate hike, the inflation report may contribute to speculation into if/when the next round of tightening will come. At the same time, since the 25 bp hike to 5.75 percent has already been recorded, a substantial amount of pressure has been relieved; so traders may instead turn to the top-tier inflation numbers for guidance.
Playing the release, the official consensus has prepared the market for a considerable improvement. If the number is in line with or slightly better than expectations, GBPUSD may target the multi-decade highs of 2.0200/20. Alternatively, if the indicator overwhelms its forecast, it would bring the gauge to the same levels that encouraged the rate hike in May; so a move to new highs would not be out of the question. As always, a green five-minute candle would be needed for confirmation of a long trade. The target should match the risk taken.
Should the core output measure of the PPI report miss expectations, it would certainly sour expectations for the later released CPI and RPI numbers, not to mention another rate hike anytime this year. On the other hand, the previous hike could buffer some of the disappointment. A print slightly below the consensus would target 2.0055 and a big miss could bring 2.0 into view. The first five-minute bar after the release would need to close lower to confirm entry on a short position. A stop can be the placed above 2.0150 or 2.02 depending on the release.