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Broadening BoE Dissent to Spark Larger GBP/USD Recovery

Broadening BoE Dissent to Spark Larger GBP/USD Recovery

2015-12-10 07:00:00
David Song, Shuyang Ren,
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- Bank of England (BoE) Widely Anticipated to Carry Current Monetary Policy Into 2016.

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

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

Despite expectations for another 8 to 1 split at the Bank of England (BoE) interest rate decision, a greater dissent within the central bank may spur a larger rebound in GBP/USD as it encourages speculation for a U.K. rate-hike in 2016.

What’s Expected:

GBP/USD BoE Rate Decision

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though BoE Governor Mark Carney appears to be in no rush to normalize monetary policy, an increased number of central bank officials showing a growing interest to raise the benchmark rate off of the record-low may spark a near-term advance in the British Pound as the Monetary Policy Committee (MPC) prepares households and businesses for higher borrowing-costs.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Manufacturing Production (MoM) (OCT)

-0.2%

-0.4%

Net Consumer Credit (OCT)

1.3B

1.2B

Retail Sales ex Auto Fuel (MoM) (OCT)

-0.6%

-0.9%

Easing business outputs accompanied by the slowdown in private-sector consumption may encourage the BoE to endorse a wait-and-see approach going into 2016, and the sterling may face additional headwinds in the year ahead should the central bank continue to highlight the external risks surrounding the region.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Markit Purchasing Manger Index- Services (NOV)

55.0

55.9

Index of Services (MoM) (SEP)

0.3%

0.4%

Consumer Price Index Core (YoY) (OCT)

1.0%

1.1%

Nevertheless, the BoE may sound more upbeat this time around amid sticky price growth paired with the pickup in service-based activity, and a more hawkish outlook for monetary policy may heighten the appeal of the sterling as it fuels interest rate expectations.

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How To Trade This Event Risk(Video)

Bearish GBP Trade: BoE Continues to Votes 8-1, Promotes Wait-and-See Stance

  • 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 2016 Rate-Hike

  • 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

  • The descending channel carried over from back in September along with the bearish formation in the Relative Strength Index (RSI) continue to cast a bearish outlook for GBP/USD, and the pair stands at risk of giving back the advance from the April low (1.4565) should we get more of the same from the BoE.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD since November 19, but the ratio continues to come off of recent extremes as it narrows to +1.26, with 56% of traders now long.
  • Interim Resistance: 1.5460 (23.6% retracement) to 1.5508 (October high)
  • Interim Support: 1.4860 (78.6% retracement) to 1.4910 (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)

NOV 2015

11/05/2015 11:00 GMT

0.50%

0.50%

-101

-181

November 2015 Bank of England (BoE) Interest Rate Decision

GBP/USD Chart

The Bank of England (BoE) stuck to its current policy stance in November, with the statement showing another 8 to 1 split within the central bank as the committee sees inflation holding below 1% until Spring 2016. Even though the Monetary Policy Committee (MPC) largely remains on course to lift the benchmark interest rate off of the record-low, it seems as though Governor Mark Carney remains in no rush to normalize policy as the central bank head continues to gauge the external factors that may weigh on the ‘solid’ recovery in the U.K. The sterling struggled to hold its ground as the BoE continued to endorse a wait-and-see approach, with GBP/USD slipping below the 1.5300 handle to end day at 1.5206.

*As we approach the holidays and thus illiquid markets, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."

Three Factors Warn of Perfect Storm in FX Markets - Caution Advised

Read More:

GBP/USD Rebound Targets Major Resistance Ahead of BoE

Price & Time: USD/MXN – Big Break Ahead?

COT-Small British Pound Traders are Most Short Since April Low

December Forex Seasonality Foresees Mixed US Dollar, S&P 500 Rally

--- 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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