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GBP/USD Vulnerable to Bank of England (BoE) Easing

GBP/USD Vulnerable to Bank of England (BoE) Easing

2016-07-14 07:00:00
David Song, Strategist
Share:

- Bank of England (BoE) Widely Anticipated to Reestablish Easing-Cycle.

- Will Governor Mark Carney Open the Door for More Quantitative Easing (QE)?

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

Trading the News: Bank of England Interest Rate Decision

According to a Bloomberg News survey 30 of the 54 economists polled forecast the Bank of England (BoE) to reduce the benchmark interest rate to a fresh record-low, and GBP/USD stands at risk of facing additional headwinds over the near to medium-term should the central bank revert back to its easing cycle.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

With the U.K. positioned to leave the European Union (EU), the BoE may have little choice but to further support the economy in 2016 as Governor Mark Carney tries to avoid a recession. A material shift in the policy outlook is likely to drag on the sterling as interest-rate expectations falter.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Total Business Investment (YoY) (1Q F)

--

-0.8%

Employment Change (3Mo3M) (APR)

60K

55K

Consumer Price Index Core (YoY) (MAY)

1.3%

1.2%

The BoE may take further steps to achieve its dual mandate as the U.K.’s departure from the EU clouds the economic outlook with increased uncertainty, and the Monetary Policy Committee (MPC) may look to enlist more non-standard measures in an effort to mitigate the downside risk for growth and inflation.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Net Consumer Credit (MAY)

1.5B

1.5B

Retail Sales ex Auto Fuel (MoM) (MAY)

0.3%

1.0%

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

2.0%

2.3%

Nevertheless, Governor Carney may try to buy more time amid signs of stronger wage growth accompanied by the pickup in private-sector spending, and the British Pound may face a relief rally should the MPC largely endorse a wait-and-see approach for monetary policy.

How To Trade This Event Risk(Video)

Bearish GBP Trade: BoE Reverts Back to Easing Cycle

  • Need red, five-minute candle following the rate decision to consider a short GBP/USD trade.
  • If market reaction favors selling sterling, 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 Endorses Wait-and-See Approach

  • 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

GBPUSD Daily

GBP/USD Daily Chart
  • The near-term rebound in GBP/USD may unravel amid the failed attempt to test the monthly opening range, with the British Pound at risk of facing near-term headwind should the BoE talk up expectations for additional monetary support.
  • Key Resistance: 1.4880 (50% retracement) to 1.4930 (38.2% expansion)
  • Key Support: 1.2460 (61.8% expansion) to 1.2500 pivot

Check out the short-term technical levels that matter for GBP/USD heading into the BoE meeting!

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)

JUN

2016

06/16/2016 11:00 GMT

0.50%

0.50%

+15

+79

June 2016 Bank of England Interest Rate Decision

GBP/USD Chart

The Bank of England (BoE) voted unanimously in June to keep the benchmark interest at the record-low of 0.50%, while maintaining its asset-purchase program at GBP 375B, but the central bank may have little choice but to reestablish its easing cycle as the Monetary Policy Committee (MPC) sees ‘growing evidence that uncertainty about the referendum is leading to delays to major economic decisions that are costly to reverse.’ With that said, the threat of the U.K. leaving the European Union (EU) may prompt Governor Mark Carney to further support the real economy in an effort to stem the downside risks surrounding the region. Despite the initial move lower in GBP/USD, the market reaction was short-lived, with GBP/USD paring earlier losses to end the day at 1.4202.

Get our top trading opportunities of 2016 HERE

Read More:

DAX: Upside Carnage Continues, Major Price Zone Next Stop

WTI Crude Oil Price Forecast: Bearish Price Channel Favors Downside Bias

COT-Unchartered Waters for Gold and Silver Positioning

USD/CAD is Fertile Ground; Watch Daily 8-EMA in GBP-crosses

--- 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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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