GBP/USD Range At Risk With BoE Rate Decision

Trading Tip – A dovish BoE could lead to a break of the current range setting the pair on a new course and negating the positions put forth. Waiting until the release will minimize risks and considering the significance of the event risk we will most likely see muted price action leading up to the announcement. Traders will want to wait until after initial volatility before taking any positions to confirm any new trends. An initial reaction that fails to break below support would lead us to our second scenario where a move back above the psychological level would justify an entry with stops and limits based on your risk tolerance. The 200-Day SMA (1.6228) converging above the 50-Day SMA (1.6219) is an ominous sign for the pair and should be heeded. The converging moving averages could be a potential resistance level and a conservative second target.  A break below support could see downside risks limited by the 38.2% Fibo of 1.3653-1.7050 which could be followed by a period of consolidation as was seen in early October. However, a failure of support could confirm that the GBP/USD is in a wide descending trend channel that would leave downside risks to 1.5600.

Event Risk for the UK and US

U.K. – The major upcoming event risk for the U.K. will be the BoE rate decision which will over shadow the consumer sentiment and service sector releases beforehand. The MPC is expected to keep rates on hold at 0.50% but the main question is whether they will bring an end to their asset purchase program. The central bank has exhausted the 200 billion pounds that were approved to this point, and for additional funding the committee would need to solicit approval from the government which would be a bearish sign for the U.K. economy. The most likely scenario is that they decide to pause their efforts and look toward next month to make a longer-term determination as they assess the impact of efforts to date. However, with inflation above their 2% target policy makers may look to lay the ground work for future tightening which would begin by officially bringing an end to their QE efforts. This could sprak a bullish sterling reaction keeping the current range intact.

U.S. – Following the stronger than expected U.S. manufacturing data a similar surprise from the service industry could continue the recent surge in risk appetite. Economists are forecasting that the gauge improved to 51.0 from 50.1 for the sector that accounts for 70% of GDP. However, the most market moving event for the week may be the Non-farm payroll report which is expected to show the U.S. economy added 10,000 jobs. Job creation in the world’s largest economy will raise expectations for global consumption and should boost risk appetite. However, the result may not necessarily translate into a positive development for the GBP/USD longs as it could raise U.S. interest rate expectations and spark a greenback rally.