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GBP/USD Needs BoE to Boost Rate Expectations to Resume Bullish Trend

GBP/USD Needs BoE to Boost Rate Expectations to Resume Bullish Trend

David Song, Strategist

- Bank of England (BoE) Updated Growth & Inflation Forecast in Focus.

- Will BoE Governor Mark Carney Look to Normalize in 2014 or 2015?

Trading the News: Bank of England (BoE) Inflation Report

The Bank of England’s (BoE) Inflation report is likely to heavily influence the near-term outlook for the GBP/USD as the central bank looks to move away from its easing cycle.

What’s Expected:

GBP/USD BoE

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Why Is This Event Important:

Indeed, the updated forecasts for growth and inflation is likely to spur increased volatility in the British Pound, but we would need to see Governor Mark Carney show a greater willingness to normalize monetary policy in 2014 for the GBP/USD to resume the upward trend carried over from the previous year.

For Real-Time Updates and Potential Trade Setups on the British Pound, sign up for DailyFX on Demand

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Construction Output s.a. (MoM) (JUN)

1.0%

1.2%

Jobless Claims Change (JUN)

-27.0K

-36.3K

Consumer Price Index Core (YoY) (JUN)

1.7%

2.0%

Sticky inflation paired with the ongoing improvement in the labor market may spur a greater dissent within the Monetary Policy Committee (MPC), and the GBP/USD may carve a key low in August should the fresh batch of central bank rhetoric boost interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Manufacturing Production (MoM) (JUN)

0.6%

0.3%

GfK Consumer Confidence (JUL)

2

-2

Retail Sales inc Auto (MoM) (JUN)

0.3%

0.1%

Nevertheless, the BoE may introduce a more relaxed approach in normalizing policy amid the ongoing slack in the U.K. economy, and the GBP/USD may face a larger decline over the remainder of the month if Governor Carney adopts a more neutral tone for monetary policy.

Read More:

GBP/USD Harami Awaiting Confirmation To Suggest Corrective Bounce

GBPUSD Shorts at Risk Above 1.68 Heading Into BoE, Inflation Data

How To Trade This Event Risk(Video)

Bullish GBP Trade: BoE Sees Scope to Raise Benchmark Interest Rate in 2014

  • Need green, five-minute candle following the statement to consider a long British Pound trade
  • If market reaction favors buying sterling, go long GBP/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; look for 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: Governor Carney Talks Down Rate Expectations

  • Need red, five-minute candle to favor a short GBP/USD trade
  • Implement same setup as the bullish British Pound trade, just in reverse

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite break of bullish RSI momentum, scope remains for a higher-low in long-term series.
  • Interim Resistance: 1.7200 Pivot to 1.7220 (100.0% expansion)
  • Interim Support: 1.6697 (June low) to 1.6730 (61.8% expansion)

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)

MAY 2014

05/14/2014 9:30 GMT

--

--

-38

-51

May 2014 Bank of England (BoE) Inflation Report

GBP/USD Chart

The Bank of England (BoE) struck an improved outlook for the U.K. economy and said that spare capacity has ‘narrowed’ somewhat, but the fresh batch of central bank rhetoric did little to boost interest rate expectations as Governor Mark Carney argued that there needs to be a further reduction in the economic slack before the Monetary Policy Committee (MPC) can start to normalize monetary policy. The British Pound struggled to hold its ground following the statement, with the GBP/USD dipping below the 1.6800 handle, and the sterling continued to weaken during the U.S. trade as the pair ended the day at 1.6764.

--- 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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