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Downside Risk for GBPUSD Once UK Monetary Policy is Left Unchanged

Downside Risk for GBPUSD Once UK Monetary Policy is Left Unchanged

2018-02-08 09:30:00
Martin Essex, MSTA, Analyst
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GBPUSD TALKING POINTS:

- The Bank of England’s rate-setting monetary policy committee will leave all its policy settings unchanged Thursday.

- However, Governor Mark Carney may take a more dovish line than expected, putting downward pressure on the British Pound.

- Join Market Analyst Nicholas Cawley for live coverage of the Bank of England’s decisions at 1145 GMT.

TRADING THE NEWS: BANK OF ENGLAND MEETING

Downside Risk for GBPUSD Once UK Monetary Policy is Left Unchanged

The Bank of England will leave all its monetary policy settings unchanged Thursday. However, the meeting of its rate-setting monetary policy committee could still provide a trading opportunity as both the bank’s quarterly Inflation Report and comments by Governor Mark Carney could lead to volatility in GBPUSD and other Pound crosses.

Clearly, the impact is likely to be less than if policy changes were on the cards but there will still be event risk as such meetings are always important and the markets are currently uncertain whether the bank will deliver one or two interest rate increases this year, and Carney’s comments could provide some guidance.

As the Brexit negotiations and UK Prime Minister Theresa May’s political future have taken a back seat, UK monetary policy has again become the main driver of GBPUSD and Thursday’s meeting is one of only four a year when the bank publishes its Inflation Report and generally makes policy changes.

Currently, the markets are fully priced in for a quarter-point rate increase in the autumn and are suggesting that the chances of a rate rise in May are around 50/50. If either the Inflation Report or Carney change those expectations, the Pound will move accordingly – up if a May increase is seen as more likely and down if it is seen as less likely.

CARNEY IN FOCUS

Until the start of this week, the Governor was generally expected to take a hawkish line. However, a softer than expected purchasing managers’ index for the UK’s dominant service sector in January, released Monday, may mean a more dovish tone. That would weaken GBPUSD further after its dip lower over the past few days. New to forex and want to find out more about trading GBPUSD? Take a look at our Forex Trading Guides.

GBPUSD PRICE CHART, HOURLY TIMEFRAME (JANUARY 25 – FEBRUARY 7, 2018)

Downside Risk for GBPUSD Once UK Monetary Policy is Left Unchanged

Chart by IG

To the downside, the first key level to watch is the 1.3837 low touched on Tuesday. A break below there could take GBPUSD back towards the low of 1.3460 touched nearly a month ago. To the upside, the first key resistance level are 1.3941 and 1.3951, where the 20-day and 50-day moving averages are located. This means more scope to the downside but stops just above those moving averages would be wise.

HOW PREVIOUS MEETING HAVE AFFECTED GBPUSD

The Bank of England increased its bank rate to 0.50% from 0.25% in November 2017 so the last comparable meeting at which rates were left unchanged and the Inflation Report was published was on August 3 last year. Immediately after that meeting, GBPUSD fell, and continued falling.

GBPUSD PRICE CHART, HOURLY TIMEFRAME (JULY 12 – AUGUST 16, 2017)

Downside Risk for GBPUSD Once UK Monetary Policy is Left Unchanged

Chart by IG

While that does not mean there will be a similar reaction this time, it shows how a decision to leave policy unchanged can still move the market. Thursday’s meeting therefore provides a trading opportunity. If you’d like to learn how to trade like an expert, you can read our guide to the Traits of Successful Traders. Some of the key lessons are:

- Successful traders cut losses, and let profits run,

- Successful traders use leverage effectively, and

- Successful traders trade at the right time of day.

For more help to trade profitably check out the IG Client Sentiment data and you can learn more still by listening to our regular Trading Webinars.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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