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British Pound to Target Fresh Highs as BoE Preserves Forward-Guidance

British Pound to Target Fresh Highs as BoE Preserves Forward-Guidance

David Song, Strategist

- Bank of England (BoE) Seen Adopting Fed-Style Interest Rate Forecast

- Will BoE Lower the Unemployment Threshold from 7%?

Trading the News: Bank of England Inflation Report

The Bank of England’s (BoE) Inflation Report may produce fresh highs in the British Pound should the central bank retain the 7% unemployment threshold, while preserving a positive outlook for the U.K. economy.

What’s Expected:

Time of release: 02/12/2014 10:30 GMT, 5:30 EST

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

However, the BoE to talk down bets for a rate hike in 2014 as inflation falls back to the 2% target, and the Monetary Policy Committee (MPC) may lay out an interest rate forecast similar to the Federal Reserve in an effort to better-manage market expectations.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (QoQ) (4Q A)

0.7%

0.7%

ILO Unemployment Rate (3M) (NOV)

7.3%

7.1%

Retail Sales ex Auto (MoM) (DEC)

0.3%

2.8%

The BoE may show a greater willingness to normalize monetary policy sooner rather than later as the U.K. recover gathers pace, and the growing threat of an asset-bubble may encourage the central bank to raise borrowing costs later this year in order to balance the risks surrounding the region.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Industrial Production (MoM) (DEC)

0.6%

0.4%

Manufacturing Production (MoM) (DEC)

0.6%

0.3%

Consumer Price Index (YoY) (DEC)

2.1%

2.0%

However, the recent slowdown in business outputs along with the lower level of price growth may prompt the BoE to implement a dovish twist to its forward-guidance, and the sterling may face a more pronounced downturn should Governor Mark Carney talk down bets of seeing a rate hike later this year or even early 2015.

How To Trade This Event Risk(Video)

Join DailyFX on Demand to Cover Current British Pound Setups

Bullish GBP Trade: BoE Shows Greater Willingness to Normalize Sooner Rather Than Later

  • Need green, five-minute candle following the statement to favor a long GBP trade
  • If reaction favors buying British Pound, long GBPUSD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; need 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 Pushes Back Rate Hike Expectations

  • Need red, five-minute candle to consider a short GBPUSD trade
  • Implement same setup as the bullish British Pound trade, just in the opposite direction

Potential Price Targets For The Release

GBPUSD Daily

Forex_British_Pound_to_Target_Fresh_Highs_as_BoE_Preserves_Forward-Guidance_body_Picture_2.png, British Pound to Target Fresh Highs as BoE Preserves Forward-Guidance

Chart - Created Using FXCM Marketscope 2.0

  • Appears to Have Carved Higher Low as RSI Retains Bullish Trend
  • Interim Resistance: 1.6700 Pivot to 1.6730 (100.0 expansion)
  • Interim Support: 1.6300 Pivot to 1.6310 (50.0 expansion)- Close Basis

Impact that the BoE Inflation report 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 2013

11/13/2013 10:30 GMT

--

--

+36

+132

November 2013 Bank of England Inflation Report

Forex_British_Pound_to_Target_Fresh_Highs_as_BoE_Preserves_Forward-Guidance_body_ScreenShot074.png, British Pound to Target Fresh Highs as BoE Preserves Forward-Guidance

The BoE adopted a more hawkish tone for monetary policy as the central bank sees the U.K. jobless rate reaching the 7% unemployment threshold faster-than-expected, and it seems as though the committee may have little choice but to normalize monetary policy ahead of schedule as the economic recovery gathers pace. Indeed, the British Pound jumped higher following the shift in the policy outlook, with the GBPUSD clearing the 1.6000 handle, and the sterling continued to gain ground throughout the day as the pair closed at 1.6054.

--- 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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