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GBP/USD to Threaten Range on Hawkish BoE- Former Support on Radar

GBP/USD to Threaten Range on Hawkish BoE- Former Support on Radar

2015-02-05 07:00:00
David Song, Shuyang Ren,
Share:

- Bank of England (BoE) Widely Anticipated to Preserve Current Monetary Policy Stance.

- Will BoE Governor Mark Carney Continue to Warn of Higher Borrowing-Costs?

For more updates, sign up for David's e-mail distribution list.

Trading the News: Bank of England (BoE) Interest Rate Decision

The Bank of England (BoE) interest rate decision may heighten the appeal of the British Pound and spark a more meaningful rebound in GBP/USD should the central bank continue to prepare U.K. households and businesses for higher interest rates.

What’s Expected:

GBP/USD Daily Chart

Click Here for the DailyFX Calendar

Why Is This Event Important:

Nevertheless, limited commentary following the policy announcement may spur a muted reaction in GBP/USD, but the forward-guidance for monetary policy may help limit the downside risk for the sterling as a growing number of Monetary Policy Committee (MPC) members show a greater willingness to normalize monetary policy over the medium-term.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto (MoM) (DEC)

-0.7%

0.2%

Jobless Claims Change (DEC)

-25.0K

-29.7K

Consumer Price Index Core (YoY) (DEC)

1.3%

1.3%

Central bank Governor Mark Carney may continue to point to higher borrowing-costs amid the stickiness in core inflation paired with the ongoing expansion in private sector activity, and the sterling may stage a larger recover over the near-term should a growing number of MPC officials show a greater willingness to move away from the easing cycle.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

BBA Loans for Home Purchases (DEC)

36.5K

35.7K

Gross Domestic Product (QoQ) (4Q A)

0.6%

0.5%

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

1.2%

-2.0%

However, the weakening outlook for global growth along with the slowdown in building activity may encourage the BoE to adopt a more dovish tone for monetary policy, and the British Pound may continue to depreciate against its U.S. counterpart should the MPC further delay its easing cycle.

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How To Trade This Event Risk(Video)

Bullish GBP Trade: No Policy Statement & More of the Same from BoE

  • Need green, five-minute candle following the decision to consider a long GBP/USD trade
  • If market reaction favors buying Cable, 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: MPC Shows Greater Willingness to Normalize Policy

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

Read More:

AUDUSD - Yesterday’s Key Reversal Could Speak Volumes

SPX500 - Neither Here Nor There

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the break of the bearish RSI momentum, GBP/USD may continue to face range-bound prices ahead of the BoE Inflation report on February 12 as market participants wait for the updated growth and inflation forecasts; larger rebound to bring former support regions in view.
  • Interim Resistance: 1.5250 (100% expansion) to 1.5270 (38.2% retracement)
  • Interim Support: 1.4950 (Jan. low) to 1.5000 pivot

Impact that the BoE rate decision has had on GBP during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 2014

01/08/2015 12:00 GMT

0.50%

0.50%

+8

+31

January 2015 Bank of England (BoE) Interest Rate Decision

GBP/USD Chart

Indeed, the Bank of England (BOE) stuck to its highly accommodative monetary policy in 2015, with the meeting minutes showing a unanimous vote to retain the wait-and-see approach. Nevertheless, BoE Governor Mark Carney retained an upbeat tone for the region as the central bank head anticipates lower energy prices to have a positive impact on growth the U.K. economy, and it seems as though the central bank remain well on its way to normalize monetary policy as he continues to warn households and business of higher borrowing-costs. Despite the neutral tone from the BoE, the sterling strengthened against its U.S. counterpart going into the North American trade, with the pair ending the day at 1.5091.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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