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GBP/USD Range Vulnerable to BoE Rate Decision/Inflation Report

GBP/USD Range Vulnerable to BoE Rate Decision/Inflation Report

2015-11-05 07:00:00
David Song, Shuyang Ren,
Share:

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

- Will There Be Another 8-1 Split Within the Monetary Policy Committee (MPC)?

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

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

A larger dissent at the Bank of England (BoE) interest rate decision accompanied by an upward revision in the central bank’s inflation forecast may heighten the appeal of the British Pound and spur a near-term rebound in GBP/USD as it boosts bets for higher borrowing-costs.

What’s Expected:

GBP/USD BoE Rate Decision

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of a stronger recovery may push the BoE to highlight a greater risk of overshooting the 2% inflation target, but another 8-1 within the Monetary Policy Committee (MPC) along with more of the same from BoE Governor Mark Carney may spur near-term headwinds for the sterling as it drags on interest rate expectations.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (3Q A)

2.4%

2.3%

CBI Business Optimism (OCT)

2

-12

Average Weekly Earnings ex. Bonus (3MoY) (AUG)

3.0%

2.8%

Subdued wage growth paired with waning confidence may encourage Governor Mark Carney and Co. to endorse a wait-and-see approach, and sterling may struggle to hold its ground following the policy meeting should the central bank show a greater willingness to further delay the normalization cycle.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Markit Purchasing Manager Index- Composite (OCT)

53.6

55.4

Retail Sales ex Auto Fuel (MoM) (SEP)

0.4%

1.7%

Employment Change (3Mo3M) (AUG)

140K

140K

Nevertheless, the pickup in private-sector activity along with the ongoing improvements in the labor markets may encourage the BoE to adopt a more hawkish tone for monetary policy, and an upward revision in the central bank’s economic forecast is likely to spark a bullish reaction in the British Pound as it fuels interest rate expectations.

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How To Trade This Event Risk(Video)

Bearish GBP Trade: BoE Votes 8-1, Endorses Wait-and-See Approach

  • Need red, five-minute candle following the rate decision to consider a short GBP/USD trade.
  • If market reaction favors selling Cable, 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.

Bearish GBP Trade: Policy Statement Highlights Greater Dissent & Risk for Stronger Inflation

  • Need green, five-minute candle to favor a long GBP/USD trade.
  • Implement same setup as the bearish sterling trade, just in the opposite direction.

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • GBP/USD appears to have carved a near-term top coming into November amid the failed attempts to close above the 100-Day SMA (1.5474), while the Relative Strength Index (RSI) largely preserves the bearish formation from back in May.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since August 21, but the ratio appears to coming off of the recent lows as it climbs to +1.49, with 60% of traders long.
  • Interim Resistance: 1.5640 (50% expansion) to 1.5650 (38.2% expansion)
  • Interim Support: 1.5089 (May low) to 1.5090 (61.8% retracement)

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)

OCT 2015

10/08/2015 11:00 GMT

0.50%

0.50%

-52

+2

October 2015 Bank of England (BoE) Interest Rate Decision

GBP/USD Chart

The Bank of England (BoE) continued to endorse a wait-and-see approach while keeping the benchmark rate unchanged at 0.50% in October as ‘a deterioration in the global demand environment would slow the pace of expansion further.’ Despite the 8-1 split within the Monetary Policy Committee (MPC), it seems as though the majority may look to further delay the normalization cycle as central bank largely retains a cautious outlook for the U.K. economy. The sterling struggled to hold its following more of the same from the BoE, with GBP/USD dipping below the 1.5300 handle, but the sterling bounced back during the North American session to end the day at 1.5343.

Read More:

GBP/USD Breakdown Potential on BoE, NFP- Levels to Know

Webinar: Big Data Week to Threaten USD- RBA, BoE, NFP Setups in Focus

--- 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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