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

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

David Song, Strategist

Trading the News: Bank of England Minutes

What’s Expected:

Time of release: 04/17/2013 8:30 GMT, 4:30 EDT

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

The Bank of England (BoE) Minutes may instill a bullish outlook for the British Pound as the central bank retains a neutral stance 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, the BoE to sound more hawkish this time around as the central bank sees above-target inflation over the next three-years, and it seems as though the Monetary Policy Committee (MPC) is slowly moving away from its easing cycle as the they anticipate a slow but sustainable recovery in the U.K.

Recent Economic Developments

The Upside

Release

Expected

Actual

Core Consumer Price Index (YoY) (MAR)

2.3%

2.4%

Net Consumer Credit (FEB)

0.4B

0.6B

Retail Sales ex Auto Fuel (MoM) (FEB)

0.6%

1.9%

The Downside

Release

Expected

Actual

Gross Domestic Product (QoQ) (4Q F)

-0.3%

-0.3%

Jobless Claims Change (FEB)

-5.0K

-1.5K

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

1.5%

1.2%

Sticky price growth along with the ongoing expansion in consumer credit may prompt the BoE to adopt a more neutral to hawkish tone for monetary policy, and the central bank may start to discuss a tentative exit strategy in the second-half of the year as the committee sees a limited risk for a triple-dip recession. However, the MPC may keep the door open to expand the balance sheet further amid the persistent slack in the real economy, and the central bank may show a greater willingness to increase the asset purchase program beyond the GBP 375B target in an effort to encourage a stronger recovery.

Potential Price Targets For The Rate Decision

Forex_GBPUSD-_Trading_the_Bank_of_England_BoE_Minutes_body_ScreenShot160.png, GBP/USD- Trading the Bank of England (BoE) Minutes

As the British Pound comes off of former support – the 50.0% Fibonacci retracement from the 2009 low to high around 1.5260 – a less dovish statement from the BoE should produce further advances in the GBPUSD, and the pair may continue to retrace the sharp decline from earlier this year should the central bank talk down speculation for more QE. However, fears of a triple-dip recession may spur further support for a highly accommodative policy stance, and we may see the MPC continue to embark on its easing cycle in order to get the U.K. economy on a more sustainable path.

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 may pave the way for a long British Pound trade as market participants scale back bets for additional monetary support. Therefore, if the MPC signals an end to the easing cycle, we will need 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 breakeven once the first trade hits its mark in order to preserve our profits.

On the other hand, 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 retain a highly accommodative policy stance over the near to medium-term in an effort to get the economy on a more sustainable path. As a result, if the committee shows a greater willingness to implement more QE, we will carry out the same setup for a short pound-dollar trade as the long position mentioned above, just in the opposite direction.

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)

MAR 2013

03/20/2013 9:30 GMT

--

--

+113

+63

March 2013 Bank of England Minutes

Forex_GBPUSD-_Trading_the_Bank_of_England_BoE_Minutes_body_ScreenShot159.png, GBP/USD- Trading the Bank of England (BoE) Minutes

The Bank of England (BoE) Minutes showed another 6-3 split within the Monetary Policy Committee, with Governor King, David Miles and Paul Fisher pushing for another GBP 25B in quantitative easing, but it seems as though the majority will stick to the sidelines as inflation is expected to hold above the 2% target over the policy horizon. Indeed, the British Pound benefitted from the neutral policy stance, with the GBPUSD testing the 1.5150 figure, but we saw the sterling consolidate during the North American trade as the pair ended the day at 1.5096.

--- 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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