GBP/USD: Trading the Bank of England Policy Meeting Minutes

Trading the News: Bank of England Policy Meeting Minutes

Why Is This Event Important:

The Bank of England is scheduled to release its meeting minutes on Wednesday at 8:30 GMT, and the statement is likely to spark increased volatility in the British Pound cross rates as investors weigh the prospects for future policy. Earlier this month, we saw the central bank hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B in order to mitigate the downside risks for growth, but a shift in the BoE’s economic assessment could set the tone for future price action as investors speculate the MPC to expand quantitative easing over the coming months.

What’s Expected:

Time of release:10/20/2010 8:30 GMT, 4:30 EST

Primary Pair Impact :GBPUSD

Expected: --

Previous: --

Will This Be Market Moving (Scenarios):

We are likely to see an 8-1 vote count once again as MPC board member Andrew Sentance pushes to gradually normalize monetary policy in the U.K., and currency traders may show little reaction to the minutes as the central bank maintains a wait-and-see approach. However, if Adam Posen votes to expand monetary policy further and sparks a three-way rift within the central banks, the GBP/USD may retrace the near-term rally as investors raise bets for an expansion in QE.

The Upside

As the headline reading for inflation continues to hold above the government’s 3% limit, members of the MPC may heed to Mr. Sentance’s call and look to slowly lift the benchmark interest rate off the record-low given the stickiness in price growth. At the same time, the central bank may talk down expectations for further easing as economic recovery slowly gathers pace, and hawkish commentary from the BoE could lead the GBP/USD to make a run at 1.6200-10, the 23.6% Fibonacci retracement from the 2009 low to high, as it maintains the rally carried over from the previous month.

The Downside

With U.K. policy makers curbing their outlook for growth and inflation, Mr. Adam Posen may vote to expand QE further and retain a dovish tone for future policy as he pushes the board not to “settle for weak growth out of misplaced fear of inflation.” As Mr. Posen strongly opposes raising the interest rate, the uncertainties surrounding the economic outlook could lead to a three-way split within the MPC as the central bank aims to balance the risks for the region.

How To Trade This Event Risk

Trading the given event risk is clearly not as clear cut as some of our previous trades, but a two-way split within the BoE could set the stage for a long British Pound trade as we expect Mr. Sentance to push for a 25bp rate hike. Therefore, if the central bank votes 8-1 to maintains its current policy or we additional members of the MPC side with Mr. Sentence , we will need a green, five-minute candle following the policy meeting minutes to generate buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, the uncertainties surrounding the economic outlook paired with the ongoing weakness within the private sector could spark increased willingness amongst the MPC to expand monetary policy further, and speculation for a further increase in QE could lead to a selloff in the sterling as interest rate expectations falter. As a result, if we see a three-way split in the BoE, we will utilize the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

Potential Price Targets For The Release

Impact Bank of England meeting minutes has had on GBP during the last release

September 2010 BoE Policy Meeting Minutes

The Bank of England policy meeting minutes showed the MPC voted 8-1 to hold the benchmark interest rate at 0.50% and to maintain its asset purchase target at GBP 200B, while board member Andrew Sentance pushed to increase borrowing costs by 25bp. The central bank said monetary policy remains appropriate to balance the risks for the region as most policy makers expect the ongoing slack within the real economy to bear down on inflation, but went onto say that the MPC stands ready to move in either direction as it aims to encourage a sustainable recovery. Some board members also saw scope to expand monetary policy further as the recent economic developments showed a “reduction in growth prospects” for the second half of 2010, and speculation for an increase in quantitative easing could materialize over the near-term given the slower pace of recovery in the U.K.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com