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GBP/USD at Risk for Relief Rally on Wait-and-See BoE

GBP/USD at Risk for Relief Rally on Wait-and-See BoE

David Song, Strategist

- Bank of England (BoE) to Preserve Record-Low Interest Rate, GBP 435B in QE.

- Will BoE Governor Mark Carney Endorse a Wait-and-See Approach for Rest of 2016?

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

Trading the News: Bank of England Interest Rate Decision

The Bank of England (BoE) interest rate decision may trigger a short-squeeze in British Pound and generate a relief rally in GBP/USD should the central bank talk down bets for an imminent rate-cut.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Even though the Monetary Policy Committee (MPC) warns ‘a majority of members expect to support a further cut in Bank Rate to its effective lower,’ the BoE may preserve the current policy throughout the remainder of the year as there appears to be a limited risk for a U.K. recession. With Deputy Governor Minouche Shafik scheduled to depart in February, Governor Mark Carney and Co. may endorse a wait-and-see approach for the foreseeable future as the central bank sees a risk of overshooting the 2% inflation-target over the policy horizon.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Markit Purchasing Manager Index- Composite (AUG)

50.8

53.6

Retail Sales ex. Auto Fuel (MoM) (JUL)

0.3%

1.5%

Total Business Investment (QoQ) (2Q P)

-0.9%

0.5%

Signs of stronger consumption accompanied by the pickup in private investment may encourage the BoE to soften its dovish outlook for monetary policy, and the British Pound may face a bullish reaction following the fresh slew of central bank rhetoric should the committee talk down bets for an imminent rate-cut.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Jobless Claims Change (AUG)

1.8K

2.4K

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

2.2%

2.1%

Consumer Price Index Core (YoY) (AUG)

1.4%

1.3%

Nevertheless, weak household earnings paired with the slowdown in job growth may push the BoE to further support the real economy, and the sterling may largely give back the rebound from August should the central bank show a greater willingness to further embark on its easing cycle in 2016.

How To Trade This Event Risk(Video)

Bullish GBP Trade: BoE Implements Range of New Easing Measures

  • Need green, five-minute candle following the rate decision to consider a long GBP/USD trade.
  • If market reaction favors a long sterling trade, buy GBP/USD with two separate position.
  • Set stop at the near-by swing low/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: MPC Sticks with Status Quo

  • Need red, five-minute candle to favor a short GBP/USD trade.
  • Implement same setup as the bullish British Pound trade, just in reverse.

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart
  • GBP/USD may face range-bound conditions over the near to medium-term as it preserves the range from July, but the pair may face a near-term short-squeeze as the exchange rate appears to be carving an ascending triangle formation, while BoE Governor Mark Carney rules out a zero-interest rate policy (ZIRP) for the U.K.
  • Key Resistance: 1.3870 (78.6% expansion) to 1.3900 (50% retracement)
  • Key Support: 1.2450 (61.8% expansion) to 1.2500 pivot

Check out the short-term technical levels that matter for GBP/JPY heading 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 BoE Interest 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)

AUG

2016

08/04/2016 13:00 GMT

0.25%

0.25%

-131

-182

August 2016 Bank of England Interest Rate Decision

GBP/USD 5-Minute

GBP/USD Chart

The Bank of England (BoE) reestablished its easing cycle in August, with the central bank announcing a ‘a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.’ Indeed, the Monetary Policy Committee (MPC) kept the door open to further support the real economy as ‘a majority of members expect to support a further cut in Bank Rate to its effective lower,’ but the fresh comments suggest Governor Mark Carney and Co. are ruling out a zero-interest rate policy (NIRP) for the U.K. as the central bank sees a risk of overshooting the 2% inflation-target over the policy horizon. The British Pound sold-off following the meaning easing package, with GBP/USD breaking below the 1.3200 handle to end the day at 1.3104.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500: Sharply Unchanged, Consolidating or Topping?

COT-British Pound Ownership Profile Warns of a Bottom

Post-Brexit NZDUSD Support Vulnerable to Weak NZ Trade Balance

USD/JPY July Recovery at Risk on Wait-and-See FOMC/BoJ Policy

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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

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