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Weaker BoE Forecasts to Drag on GBP/USD Rebound

Weaker BoE Forecasts to Drag on GBP/USD Rebound

2016-05-12 07:00:00
David Song, Strategist
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- Bank of England (BoE) to Keep Benchmark Interest Rate at Record-Low.

- Will Signs of Stick Inflation Spur a Dissent Within the Monetary Policy Committee (MPC)?

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Trading the News: Bank of England Interest Rate Decision

Even though the Bank of England (BoE) is widely anticipated to retain its current policy in May, a downward revision in the central bank’s growth and inflation forecast may dampen the appeal of the British Pound and spur a bearish reaction in GBP/USD as it drags on interest-rate expectations.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Indeed, Governor Mark Carney may continue to argue that the next move will be to normalize monetary policy, but the central bank may sound increasingly cautious this time around as the U.K. Referendum clouds the economic outlook for the region.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (MAR)

-0.3%

-1.6%

Jobless Claims Change (MAR)

-10.0K

6.7K

Employment Change (3Mo3M) (FEB)

60K

20K

Waning job growth accompanied by the slowdown in private-sector consumption may prompt the Monetary Policy Committee (MPC) to trim its growth and inflation forecast, and a meaningful downward revision may drag on sterling as market participants further push out bets for a BoE rate-hike.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (1Q A)

2.0%

2.1%

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

2.1%

2.2%

Consumer Price Index Core(YoY) (MAR)

1.3%

1.5%

Nevertheless, sticky inflation paired signs of stronger wage growth may spur a dissent within the MPC, and a split vote to retain the current policy may generate a bullish reaction in the British Pound as it puts increased pressure on the BoE to normalize monetary policy sooner rather than later.

How To Trade This Event Risk(Video)

Bearish GBP Trade: BoE Trims Growth & Inflation Forecast

  • Need red, five-minute candle following the GDP report to consider a short sterling trade.
  • If market reaction favors bearish British Pound 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: MPC Adopts More Hawkish Outlook for Monetary Policy

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

Potential Price Targets For The Release

GBPUSD Daily

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Even though GBP/USD remains stuck in a narrow range ahead of the BoE meeting, the pair may make a more meaningful attempt to threaten the downward trend carried over from August, with the pound-dollar at a risk for a further advance as long as the Relative Strength Index (RSI) retains the bullish formation from earlier this year.
  • Interim Resistance: 1.4910 (61.8% retracement) to 1.4930 (38.2% expansion)
  • Interim Support: 1.3870 (78.6% expansion) and 1.3960 (50% expansion)

Check out theshort-term technical levels that matter for GBP/JPYheading into the report!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

Impact that the Bank of England 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)

APR

2016

04/14/2016 13:00 GMT

0.50%

0.50%

+7

+18

April 2016 Bank of England Interest Rate Decision

GBP/USD Chart

The Bank of England (BoE) once again voted unanimously to keep the benchmark interest rate at the record-low of 0.50%, while retaining its asset-purchase program at GBP 375B. Moreover, the BoE warned of below-target inflation over the short-run even as growth remains ‘steady,’ and largely argued that the recent depreciation in the sterling amid the ‘uncertainty surrounding the forthcoming referendum on the United Kingdom’s membership of the European Union.’ Nevertheless, the British Pound edged higher following the rate decision as the central bank continued to suggest that the next move will be to normalize monetary policy, with GBP/USD ending the day at 1.4150.

Get our top trading opportunities of 2016 HERE

Read More:

Record Trend Following Long Position in Gold

AUD/CAD Into Key Support- Monthly Opening Range In Focus

US Dollar Bear Trap within an Even Bigger Bull Trap?!

USD/JPY Technical Analysis: Has It Bottomed?

--- 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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