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How Will the BoE’s Forward-Guidance Influence the GBPUSD?

By , Currency Analyst
07 August 2013 08:00 GMT

Trading the News: Bank of England Inflation Report

The Bank of England quarterly inflation report is likely to heavily impact the British Pound as the central bank is set to announce it updated assessment of the U.K. economy.

What’s Expected:

Time of release: 08/07/2013 09:30 GMT, 5:30 EDT

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

As the BoE pledges to adopt a ‘mixed strategy’ for monetary policy, there’s speculation that the central bank will introduce forward-guidance for monetary policy, and the fresh stance may shift the near-term outlook for the GBPUSD should the central bank introduce more non-standard measures to encourage a stronger recovery.

The Upside/Bullish Scenario

Release

Expected

Actual

NIESR GDP Estimate (JUL)

--

0.7%

Gross Domestic Product (QoQ) (2Q A)

0.6%

0.6%

Consumer Price Index Core (YoY) (JUN)

2.3%

2.3%

With the positive developments coming out of the U.K. economy, the BoE may steer away from adopting a threshold for monetary policy (like the Federal Reserve) and strike a similar tone to the European Central Bank, where the Monetary Policy Committee pledges to keep interests low for an extended period of time.

The Downside/Bearish Scenario

Release

Expected

Actual

Mortgage Approvals (JUN)

59.7K

57.7K

Net Consumer Credit (JUN)

0.7B

0.5B

Average Weekly Earnings ex Bonus (3MoY) (MAY)

1.1%

1.0%

Nevertheless, should the BoE implement a ‘qualitative approach’ for monetary policy and establish a threshold for unemployment or inflation, such a move could delay the MPC’s exit strategy.

How To Trade This Event Risk

Trading the quarterly inflation may not be as clear cut as some of our previous trades given the market speculation surrounding the central bank, but a more upbeat tone coming out of the BoE may pave the way for a long British Pound trade as the MPC turns increasingly optimistic towards the economy. Therefore, if the BoE raises its fundamental outlook for the region and refrains from implementing a threshold for its forward-guidance, we will need a green, five-minute candle following the release to consider a long entry on two-lots of GBPUSD. Once these conditions favor a long trade, we will place the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish 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 hits its mark in an effort to preserve our profits.

On the other hand, should the BoE follow the Fed and implement a ‘qualities approach’ for monetary policy, expectations for a more accommodative MPC may spark a sharp selloff in the GBPUSD. As a result, if the central bank adopts a threshold for its forward-guidance, we will carry out the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

Potential Price Targets For The Rate Decision

Forex_How_Will_the_BoEs_Forward-Guidance_Influence_the_GBPUSD_body_ScreenShot254.png, How Will the BoE’s Forward-Guidance Influence the GBPUSD?

The 50.0% Fibonacci expansion around the 1.5390-1.5400 may continue to hold up as resistance should the BoE adopt a similar approach to the FOMC, and we may see the 61.8% retracement (1.4850) come back on the radar should the pair search for support. However, a mere pledge to keep interests low for a prolonged period may have a limited impact in spurring a major decline in the exchange rate, and the GBPUSD may face whipsaw-like prices before a move higher as it puts in a higher low in August.

Impact that the Bank of England Inflation Report has had on GBP during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2013

05/15/2013 9:30 GMT

--

--

-21

-10

May 2013 Bank of England Inflation Report

Forex_How_Will_the_BoEs_Forward-Guidance_Influence_the_GBPUSD_body_ScreenShot253.png, How Will the BoE’s Forward-Guidance Influence the GBPUSD?

Although the Bank of England said a recovery is now ‘in sight’ for the U.K., the central bank retained a rather cautious tone for the region as the pickup in economic activity remains ‘weak and uneven.’ Despite the upbeat comments, the British Pound did failed to benefit from the updated forecast, with the GBPUSD slipping below the 1.5200 handle, but the sterling firmed up throughout the day as the pair closed at 1.5233.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, please follow this link.

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07 August 2013 08:00 GMT