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Forex: GBP/USD- Trading the Bank of England Minutes

Forex: GBP/USD- Trading the Bank of England Minutes

David Song, Strategist

Trading the News: Bank of England Minutes

What’s Expected:

Time of release: 11/21/2012 9:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

Although the Bank of England (BoE) held a cautious outlook for growth, heightening price pressures in the U.K. will limit the scope for additional monetary support as the economy emerges from the double-dip recession. Indeed, we’ve seen a growing number of central bank officials highlight the stickiness in consumer price growth, and the meeting minutes may reveal a growing rift within the Monetary Policy Committee as the central back no longer sees a risk of undershooting the 2% target for inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

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

2.0%

1.9%

Consumer Price Index (YoY) (OCT)

2.4%

2.7%

Producer Price Index Output n.s.a. (YoY) (OCT)

2.5%

2.5%

The Downside

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (OCT)

-0.1%

-0.7%

Jobless Claims Change (OCT)

0.0K

10.1K

GfK Consumer Confidence Survey (OCT)

-28

-30

Above-target inflation along with the uptick in wage growth is likely to stoke greater concern for price stability, and we should see the MPC carry its wait-and-see approach into the following year as the committee maintains a very accommodative policy stance. However, central bank doves may push for more QE amid the ongoing slack within the real economy paired with the risks presented by the deepening recession in the euro-area, and the BoE may keep the door to expand its balance sheet further as the fundamental outlook for the region remains clouded with high uncertainty.

Potential Price Targets For The Rate Decision

Forex_GBPUSD-_Trading_the_Bank_of_England_Minutes_body_ScreenShot065.png, Forex: GBP/USD- Trading the Bank of England Minutes

Although we’re seeing the GBPUSD maintain the downward trend from 2011, the relative strength index looks poised for a bullish breakout, and the BoE Minutes may serve as the catalyst to spark a move back above the 1.6000 figure should the statement sap bets for more QE. However, as central bank doves argue for a further expansion in the central bank’s balance sheet, signs for further easing could trigger another run at 1.5800, and the bearish trend in the pound-dollar may get extended into 2013 should the BoE lean towards more easing.

How To Trade This Event Risk

Trading the BoE Minutes may not be as clear cut as some of our previous trades, but we would need to hear a more balanced tone from the central bank to pave the way for a long British Pound trade. Therefore, if an increased number of the MPC endorses a neutral policy stance for the near to medium-term, we will need to see a green, five-minute candle following the statement to establish a buy entry on two-lots of GBPUSD. 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 hits its mark in an effort to lock-in our gains.

On the other hand, the BoE may retain a cautious amid the protracted recovery, and the central bank may show a greater willingness to expand its balance sheet further in an effort to get the economy on a more sustainable path. As a result, if a majority sees scope to expand the asset purchase program beyond the GBP 375B target, we will carry out the same setup for a short pound-dollar trade as the long position laid out above, just in reverse.

Impact that the Bank of England Minuteshas 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)

OCT 2012

10/17/2012 8:30 GMT

--

--

+21

+15

October 2012 Bank of England Minutes

Forex_GBPUSD-_Trading_the_Bank_of_England_Minutes_body_ScreenShot060.png, Forex: GBP/USD- Trading the Bank of England Minutes

Although the Bank of England (BoE) voted unanimously to maintain its current policy in October, the meeting minutes showed a growing number of central bank officials scaling back their call for more quantitative easing as the U.K. economy appears to be emerging from the double-dip recession. Indeed, the less dovish tone struck by the central bank propped up the British Pound, with the GBP/USD climbing above the 1.6150 figure, but we saw the sterling consolidate throughout the North American trade as the pair ended the day at 1.6144.

--- 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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