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GBP/USD Recovery Hinges on BoE Forecast- Bearish Outlook at Risk

GBP/USD Recovery Hinges on BoE Forecast- Bearish Outlook at Risk

David Song, Shuyang Ren,

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- Bank of England (BoE) to Retain Current Policy on ‘Super Thursday.’

- Will the BoE Highlight Greater Risk of Overshooting Long-Term Inflation Target?

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Trading the News: Bank of England (BoE) Interest Rate Decision

The Bank of England (BoE) interest rate decision is likely to reveal another 8 to 1 split as the central bank remains in no rush to normalize monetary policy, but the updated forecasts may heighten the appeal of the sterling and fuel a larger recovery in GBP/USD should the central bank highlight a greater risk of overshooting the 2% inflation target over the policy horizon.

What’s Expected:

GBP/USD BoE

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Why Is This Event Important:

Even though Governor Mark Carney largely endorses a wait-and-see approach, an upward revision in the BoE’s economic projections may boost interest rate expectations as central bank officials remain upbeat on the U.K. economy and prepare households/businesses for higher borrowing-costs.

Expectations: Bearish Argument/Scenario

ReleaseExpectedActual
CBI Reported Sales (JAN)1816
Retail Sales ex Auto Fuel (MoM) (DEC)-0.3%-0.9%
Construction Output s.a. (MoM) (NOV)0.5%-0.5%

The BoE may make an attempt to buy more time amid the ongoing slack in the real economy, and more of the same from the Monetary Policy Committee (MPC) accompanied by concerns of a slower recovery may reinforce a long-term bearish outlook for Cable as Governor Carney and Co. lags behind their U.S. counterpart.

Risk: Bullish Argument/Scenario

ReleaseExpectedActual
Mortgage Approvals (DEC)69.6K70.8K
Average Weekly Earnings ex. Bonus (3MoY) (NOV)1.8%1.9%
Consumer Price Index Core (YoY) (DEC)1.2%1.4%

Nevertheless, signs of sticky price growth paired with the pickup in private-sector lending may push the BoE to drop its dovish tone, and the fresh updated coming out of the central bank may spur a larger recovery in the British Pound should the central bank show a greater willingness to implement a rate-hike in 2016.

How To Trade This Event Risk(Video)

Bearish GBP Trade: MPC Continues to Endorse Wait-and-See Approach

  • Need red, five-minute candle following the rate decision to consider a short GBP/USD trade.
  • If market reaction favors selling Cable, short GBP/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit.

Bearish GBP Trade: BoE Highlights Greater Risk of Overshooting Long-Term Inflation Target

  • Need green, five-minute candle to favor a long GBP/USD trade.
  • Implement same setup as the bearish sterling trade, just in reverse.

Potential Price Targets For The Release

GBP/USD Daily

Chart - Created Using FXCM Marketscope 2.0

  • Long-term outlook for GBP/USD remains tilted to the downside as the pair preserves the downward trend from back in August, but the near-term advance in the Relative Strength Index (RSI) may foreshadow a larger correction in the exchange rate as the oscillator threatens the bearish formation carried over from May.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since November 19, but the ratio continues to come off of the extremes readings from January as it narrows to +1.14, with 53% of traders now long.
  • Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
  • Interim Support: 1.3870 (78.6% expansion) and 1.4000 pivot

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Impact that the BoE rate decision has had on GBP during the last meeting

PeriodData ReleasedEstimateActualPips ChangePips Change
JAN 201601/14/2016 12:00 GMT0.50%0.50%-12+39

January 2016 Bank of England (BoE) Interest Rate Decision

GBP/USD Chart

As expected, the Bank of England (BoE) retained its current policy at its first meeting for 2016, with the Monetary Policy Committee (MPC) once again voting 8 to 1 to keep the benchmark interest rate on hold at 0.50%. Even though the BoE continues to highlight the bright signs coming out of the U.K. economy, persistent low energy prices may become a growing concern for Governor Mark Carney and Co. as the central bank now expects a more gradual increase in inflation that previously expected. There was a limited market reaction as we got more of the same from the BoE, but the sterling bounced back during the North American trade to end the day at 1.5229.

Read More:

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USD/JPY-Don’t Forget about the 26 Year Trendline

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USD/CAD Technical Analysis: CAD Bulls Likely In Charge below 1.4325 (Levels)

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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