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GBPUSD: Trading the Bank of England Minutes

By , Currency Strategist  and  , Currency Analyst
22 February 2012 04:30 GMT

Trading the News: Bank of England Minutes

What’s Expected:

Time of release: 02/22/2012 9:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

The Bank of England Minutes may spur a bullish reaction in the British Pound as we expect the central bank to soften its dovish tone for monetary policy, and the Monetary Policy Committee may endorse a wait-and-see approach throughout 2012 as the economic recovery in the U.K. gradually gathers pace. As the BoE now sees a limited risk of undershooting the 2% target for inflation, we are likely to see a more balanced statement, and the MPC may look to conclude its easing cycle this year as the fundamental outlook for Britain improves.

Recent Economic Developments

The Upside

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (JAN)

-0.3%

1.2%

Nationwide Consumer Confidence (JAN)

40

47

Average Weekly Earnings ex-Bonus (3MoY) (DEC)

1.9%

2.0%

The Downside

Release

Expected

Actual

Jobless Claims Change (JAN)

3.0K

6.9K

Net Consumer Credit (DEC)

0.4B

-0.4B

Gross Domestic Product (QoQ) (4Q A)

-0.1%

-0.2%

The rise in private sector consumption paired with the rebound in household sentiment may encourage the BoE to raise its fundamental outlook for the U.K., and the development may spark another run at the 200-Day SMA (1.5917) as market participants scale back speculation for more quantitative easing. However, the BoE may hold a cautious tone for the region amid the ongoing weakness in the labor market paired with fears of a double-dip recession, and the central bank may keep the door open to expand its asset purchase program beyond GBP 325B in order to stem the downside risks for growth and inflation. In turn, the GBP/USD may continue to give back the rebound from the previous week, and we may see the exchange rate struggle to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50 as market participants raise bets for additional monetary support.

Potential Price Targets For The Rate Decision

GBPUSD_Trading_the_Bank_of_England_Minutes_body_STERLING_DAILY_02.png, GBPUSD: Trading the Bank of England Minutes

A look at the encompassing structure of the GBPUSD sees the pair probing below the key 61.8% Fibonacci extension taken from October 6th and January 13th troughs at 1.5790 with the 10-day moving average providing some interim daily support at 1.5777. This level is now our bottom limit with a break eyeing subsequent support targets at 1.5730 and the 50% Fibonacci extension at 1.5685. Daily resistance holds at the convergence of trendline resistance dating back to the October 31st high and soft resistance at 1.5880 backed by the 76.4% extension at 1.5925. Note that the slope of the daily relative strength index suggests further losses in the interim with a break below the 50-mark risking further losses for the pound.

GBPUSD_Trading_the_Bank_of_England_Minutes_body_STERLING_SCALP.png, GBPUSD: Trading the Bank of England Minutes

Interim support rests with the 38.2% Fibonacci extension taken from the February 8th and 20th crests at 1.5770, backed by 1.5750, the 50% extension at 1.5735, and the 61.8% extension at the 1.57-figure. Soft resistance holds at 1.5790 with subsequent topside targets eyed at the 23.6% Extension at 1.5815, 1.5840, and 1.5860. Should the BoE Minutes prompt a bullish reaction, look to target topside levels with a breach above our Fibonacci reference point at 1.5780 negating subsequent support targets. Such a scenario eyes initial targets at the 1.59-handle and the 2012 high at 1.5925.

How To Trade This Event Risk

Trading the given event risk is certainly not as clear cut as some of our previous trades, but a less dovish statement could pave the way for a long British Pound trade as market participants curb speculation for more QE. Therefore, if the central bank strikes a neutral tone for monetary policy and raises the outlook for the region, we will need a green, five-minute candle subsequent to the release to establish a 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 from the entry, and this risk will generate our first objective. The second target 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 order to protect our profits.

On the other hand, fears of a double-dip recession paired with the ongoing weakness within the real economy may lead the BoE to maintain a dovish outlook for monetary policy, and the central bank may see scope to expand monetary policy further in an effort to stimulate a stronger recovery. As a result, if the MPC curbs its forecast for growth and inflation, speculation for more QE is likely to weigh on the exchange, and we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.

Impact that the Bank of England Minutes has had on GBP during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 2012

01/25/2012 9:30 GMT

--

--

+51

+119

January 2102 Bank of England Minutes

GBPUSD_Trading_the_Bank_of_England_Minutes_body_ScreenShot069.png, GBPUSD: Trading the Bank of England Minutes

After voting unanimously to maintain its current policy in January, the Bank of England left the door open to expand its asset purchase program in an effort to shield the U.K. economy from a ‘renewed severe downturn,’ but struck a more balanced tone for the region as central bank officials expect to see a stronger recovery in 2012. As the MPC softened its dovish outlook for monetary policy, the statement pushed the GBP/USD back above 1.5550, and the sterling continued to gain ground during the North American trade to settle at 1.5653.

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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22 February 2012 04:30 GMT