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

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

2012-12-18 21:00:00
David Song, Strategist
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Trading the News: Bank of England Minutes

What’s Expected:

Time of release: 12/19/2012 9:30 GMT, 4:30 EST

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

The Bank of England (BoE) Minutes may reinforce a bullish outlook for the British Pound as the central bank softens its dovish tone for monetary policy, and the fresh batch of central bank rhetoric may trigger a short-term rally in the GBPUSD as market participants scale back bet for more quantitative easing. Beyond the vote count, we anticipate the BoE to sound more hawkish this time around as the central bank sees above-target inflation over the next two-years, and the Monetary Policy Committee (MPC) may start to discuss a tentative exit strategy in the year ahead as the U.K. emerges from the double-dip recession.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Price Index (YoY) (NOV)

2.7%

2.7%

Jobless Claims Change (NOV)

7.0K

-3.0K

BoE/GfK Inflation 12-Month Expectations (NOV)

--

3.5%

The Downside

Release

Expected

Actual

Industrial Production (MoM) (OCT)

0.8%

-0.8%

Purchasing Manager Index Construction (NOV)

50.5

49.3

Retail Sales ex Auto Fuel (MoM) (OCT)

-0.1%

-0.7%

Sticky price growth along with the uptick in inflation expectations may prompt the BoE to bring its easing cycle to an end, and we may see the central bank show a greater willingness to lift the benchmark interest rate off of the record-low in an effort to stem the threat for inflation. However, the central bank may keep the door open to expand its balance sheet further amid the persistent slack in private sector activity, and the MPC may retain a cautious tone for the region as policy makers see a very gradual recovery ahead.

Potential Price Targets For The Policy Statement

Forex_GBPUSD-_Trading_the_Bank_of_England_BoE_Minutes_body_ScreenShot129.png, Forex: GBP/USD- Trading the Bank of England (BoE) Minutes

The BoE Minutes may spark a run at the September high (1.6308) should the central bank talk down speculation for more QE, and we may see the GBPUSD trade a fresh yearly highs ahead of the New Year as interest rate expectations pick up. However, the pound-dollar may struggle to hold above the 23.6% Fibonacci retracement from the 2009 low to high around 1.6200 if we see the central bank show a greater willingness to expand its balance sheet further, and the GBPUSD may face a sharp reversal as it remains capped around the 1.6300 figure.

How To Trade This Event Risk

Trading the BoE Minutes may not be as clear cut as some of our previous trades, but a more hawkish statement from the central bank may pave the way for a long British Pound trade as market participants scale back bets for more easing. Therefore, if the MPC drops its dovish tone for monetary and signals an end to the easing cycle, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots of GBPUSD. Once these conditions are fulfilled, 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 cost once the first trade hits its mark in an effort to lock-in our gains.

In contrast, the BoE may keep the door open to expand its balance sheet further as the U.K. faces a protracted recovery, and the central bank may carry its easing cycle into the following year in an effort to get the economy on a more sustainable path. As a result, if the committee shows a greater willingness to implement additional monetary support, we will carry out the same setup for a short pound-dollar trade as the long position mentioned 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)

NOV 2012

11/21/2012 9:30 GMT

--

--

-1

+40

November 2012 Bank of England Minutes

Forex_GBPUSD-_Trading_the_Bank_of_England_BoE_Minutes_body_ScreenShot128.png, Forex: GBP/USD- Trading the Bank of England (BoE) Minutes

The Bank of England (BoE) voted 8-1 to keep the benchmark interest rate at 0.50% while maintaining its asset purchase target at GBP 375B, but we saw board member David Miles push for another GBP 25B in quantitative easing in an effort to encourage a stronger recovery. Indeed, the neutral policy stance held by the BoE propped up the British Pound, with the GBPUSD climbing above 1.5925, and the sterling continued to gain ground throughout the North American trade as the pair ended the day at 1.5950.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

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