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BoE Forecasts to Drive GBP/USD- ‘Inflation Overshoot’ to Fuel Rebound

BoE Forecasts to Drive GBP/USD- ‘Inflation Overshoot’ to Fuel Rebound

2016-11-03 04:00:00
David Song, Strategist
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- Bank of England (BoE) to Hold Benchmark Interest Rate at 0.25%, QE Purchases at GBP 435B.

- Will BoE Officials See a Greater Risk of ‘Inflation Overshoot’ Amid the Depreciation in the Sterling?

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

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

The Bank of England (BoE) is widely anticipated to retain the current policy in November, but the fresh updates coming out of the central bank may produce increased volatility in GBP/USD as Governor Mark Carney and Co. keep the door open to further embark on its easing-cycle.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

With the economic outlook for the U.K. clouded with high uncertainty, the Monetary Policy Committee (MPC) is likely to reiterate that ‘a majority of members expect to support a further cut in Bank Rate to its effective lower bound,’ and the longer-term outlook for the sterling remains tilted to the downside as the new governor under Prime Minister Theresa May prepare to leave the European Union (EU). However, the BoE may largely endorse a wait-and-see approach going into 2017 as the sharp depreciation in the British Pound heightens the risk of overshooting the 2% target for inflation, and GBP/USD may stage a relief rally following the ‘Super Thursday’ event should the central bank talk down expectations for an imminent rate-cut.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (YoY) (3Q A)

2.1%

2.3%

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

2.1%

2.3%

Consumer Price Index Core (YoY) (SEP)

1.4%

1.5%

Heightening price pressures accompanied by signs of a stronger-than-expected recovery may encourage the BoE to carry the current policy into 2017, and an upward revision in the inflation forecast may spark a larger rebound in the pound-dollar as market participants push out bets for lower borrowing-costs.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales ex Auto Fuel (MoM) (SEP)

0.2%

0.0%

Construction Output s.a. (MoM) (AUG)

0.0%

-1.5%

Manufacturing Production (MoM) (AUG)

0.4%

0.2%

Nevertheless, the MPC may stay committed in further supporting the real economy amid the downside risks the growth outlook, and more of the same from Governor Carney and Co. may drag on the sterling as the central bank pushes monetary policy into unchartered territory.

How To Trade This Event Risk(Video)

Bullish GBP Trade: BoE Sees Greater Risk of ‘Inflation Overshoot’

  • Need green, five-minute candle following the rate-decision to consider a long GBP/USD position.
  • 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 Keeps the Door Open for Lower Borrowing-Costs

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

Potential Price Targets For The Release

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for GBP/USD remains tilted to the downside as the exchange rate preserves the bearish trend carried over from September, but the pair stands at risk for a larger correction as price appears to be diverging with the Relative Strength Index (RSI); may see GBP/USD highlight a similar dynamic to the momentum indicator especially as the oscillator continues to come off of oversold territory.
  • Interim Resistance: 1.2920 (100% expansion) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

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

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)

SEP

2016

09/15/2016 11:00 GMT

0.25%

0.25%

-6

+20

September 2016 Bank of England Interest Rate Decision

GBP/USD 5-Minute

GBP/USD Chart

Chart - Created Using Trading View

The Bank of England (BoE) voted unanimously to retain the current policy in October, but kept the door open to further embark on its easing cycle, with the central bank reiterating that ‘a majority of members expect to support a further cut in Bank Rate to its effective lower bound.’ Indeed, the Monetary Policy Committee (MPC) may take additional steps to support the real economy especially as the U.K. prepares to depart from the European Union (EU), but Governor Mark Carney and Co. may largely endorse a wait-and-see approach throughout the remainder of the year as the central bank sees a growing threat of overshooting the 2% target for inflation. More of the same out of the BoE sparked a limited reaction in the British Pound, with GBP/USD bouncing back from the 1.3200 handle to end the day at 1.3236.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500: Election Volatility and Short-term Trading Levels

Forex Technical Focus: AUD/JPY and a Big Confluence

USD/JPY Rally Vulnerable to Wait-and-See BoJ, 7 to 3 FOMC Split

NZD/USD at Risk for Further Losses Heading into U.S. 3Q GDP

--- 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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