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GBP/USD Bearish Formation at Risk on Hawkish BoE Forward-Guidance

GBP/USD Bearish Formation at Risk on Hawkish BoE Forward-Guidance

2015-02-12 05:00:00
David Song, Shuyang Ren,
Share:

- Bank of England (BoE) Widely Anticipated to Reduce Inflation Forecast.

- 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) Inflation Report

Despite bets of seeing the Bank of England (BoE) further reduce its inflation forecast, the fresh batch of central bank rhetoric may encourage a more meaningful rebound in GBP/USD should Governor Mark Carney continue to prepare U.K. households and businesses for higher borrowing-costs.

What’s Expected:

GBP/USD BoE

Click Here for the DailyFX Calendar

Why Is This Event Important:

Indeed, the BoE may implement a more hawkish twist to its forward-guidance as the region gets on a more sustainable path, and Governor Carney may show a greater willingness to normalize monetary policy over the medium-term as the central bank head turns increasingly upbeat towards the economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Industrial Production (MoM) (DEC)

-0.1%

-0.2%

Gross Domestic Product (QoQ) (4Q A)

0.6%

0.5%

Average Weekly Earnings ex Bonus (NOV)

1.9%

1.8%

Subdued wage growth paired with slowdown in business outputs may push the BoE to further delay its normalization cycle, and the central bank may show a greater willingness to retain its current policy throughout 2015 in an effort to further mitigate the downside risks for growth and inflation.

Risk: Bullish 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%

Nevertheless, Governor Carney may look to raise the benchmark interest rate sooner rather than later amid the pickup in private consumption along with the ongoing improvement in the labor market, and the British Pound may show a more meaningful recovery in the days ahead should the fresh batch of central bank rhetoric boost interest rate expectations.

Read More:

EUR/USD Coils in 100-pip Range; GBP-crosses Breakout Before BoE

CADJPY Holding Trend Support, For Now

How To Trade This Event Risk(Video)

Bearish GBP Trade: BoE Talks Down Interest Rate Expectations

  • Need red, five-minute candle following the GDP print to consider a short British Pound trade
  • If market reaction favors bearish sterling trade, short GBP/USD with two separate position
  • Set stop at the near-by swing high/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

Bullish GBP Trade: Governor Carney Continues to Warn of Higher Borrowing-Costs

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

Potential Price Targets For The Release

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the break of the bearish RSI momentum, need to clear the descending channel formation dating back to July 2014 to favor a larger recovery in GBP/USD.
  • Interim Resistance: 1.5490 (23.6% expansion) to 1.5500 pivot
  • Interim Support: 1.4900 pivot to 1.4950 (2015 low)

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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 2014

11/12/2014 10:30 GMT

--

--

-81

-164

November 2014 Bank of England (BoE) Inflation Report

GBP/USD Bearish Formation at Risk on Hawkish BoE Forward-Guidance

The Bank of England (BoE) struck a very dovish tone for monetary policy while delivering its quarterly inflation report as the central bank anticipates price growth to fall below 1% over the next six-months on the back of lower food and energy costs. It seems as though BoE Governor Mark Carney will further delay the normalization cycle amid the low-inflation environment, and the central bank may show a greater willingness to retain its highly accommodative policy stance for an extended period of time as the economic outlook for the euro-zone, the U.K.’s largest trading partner, remains clouded with high uncertainty. The dovish twist to the policy outlook dragged on the British Pound, with GBP/USD breaking below the 1.5800 handle during the North America trade to end the day at 1.5773.

--- 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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