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GBP Relief Rally Struggles Ahead of BoE; Bearish RSI Trigger Unfolds

GBP Relief Rally Struggles Ahead of BoE; Bearish RSI Trigger Unfolds

2016-12-15 07:00:00
David Song, Strategist
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- Bank of England (BoE) to Keep Benchmark Interest Rate at 0.25%, QE Program at GBP 435B.

- Will BoE Officials Show Greater Concerns for Above-Target Inflation?

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

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

Even though the Bank of England (BoE) is widely expected to retain the current policy at its last interest-rate decision for 2016, hawkish rhetoric from Governor Mark Carney and Co. may generate a larger relief rally in GBP/USD as central bank officials warn ‘there are limits to the extent to which above-target inflation can be tolerated.’

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The Monetary Policy Committee (MPC) is likely to endorse a wait-and-see approach going into 2017 as recent ‘data suggest that the near-term outlook for activity is stronger than expected three months ago,’ and the central bank may continue to talk down expectations for additional monetary support as officials expect inflation to exceed the 2% target over the policy horizon. Nevertheless, more of the same from the BoE may lead to a lackluster reaction especially as the U.K.’s departure from the European Union (EU) clouds the outlook for growth and inflation.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

2.6%

2.6%

Consumer Price Index Core (YoY) (NOV)

1.3%

1.4%

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

0.4%

2.0%

Stronger consumption accompanied by the pickup in price growth may push the BoE to adopt a more hawkish tone ahead of 2017, and the British Pound may further recoup the losses following the U.K. Referendum in June should the central bank continue to change its tune over the coming months.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Employment Change (3Mo3M) (OCT)

50K

-6K

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

0.2%

-0.6%

Manufacturing Production (MoM) (OCT)

0.2%

-0.9%

However, the BoE may cast a more cautious outlook this time around amid easing job growth paired with slowing outputs, and GBP/USD may struggle to retain the rebound following the British Pound ‘flash crash’ should the fresh comments drag on interest rate expectations.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bullish GBP Trade: MPC Becomes Increasingly Concerned 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: BoE Keeps the Door Open to Further Support U.K. Economy

  • 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

Chart - Created Using Trading View

  • Following the market reaction to the FOMC interest rate decision, GBP/USD may continue to pare the rebound following the British Pound ‘flash crash’ as the exchange rate threatens the upward trending channel carried over from October, with the Relative Strength Index (RSI) highlighting a similar dynamic; break/close below the Fibonacci overlap around 1.2460 (61.8% expansion) to 1.2500 (38.2% retracement) opens up the next downside target around 1.2370 (50% expansion) followed by 1.2270 (23.6% retracement).
  • Interim Resistance: 1.2920 (100% expansion) to 1.2950 (23.6% expansion)
  • Interim Support: 1.1905 (2016-low) and 1.2100 (61.8% expansion)

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)

NOV

2016

11/03/2016 12:00 GMT

0.25%

0.25%

+58

+37

November 2016 Bank of England Interest Rate Decision

GBP/USD 5-Minute

GBP/USD Chart

Chart - Created Using Trading View

The Bank of England (BoE) kept the benchmark interest rate on hold at 0.25% while maintaining its asset-purchase program at GBP 435B, and the central bank appears to be in no rush to further embark on its easing-cycle as Governor Mark Carney and Co. warn ‘monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.’ The recent comments suggest the Monetary Policy Committee (MPC) will carry the current policy into 2017 as U.K. price growth is expected ‘to rise to a rate above the 2% target, for an extended period, as a result of the depreciation of sterling that had accompanied the referendum result,’ and the central bank may continue to talk down expectations for additional monetary support as ‘there are limits to the extent to which above-target inflation can be tolerated.’ The shift in central bank rhetoric propped up the British Pound, with GBP/USD advancing from 1.2422 to end the day at 1.2459.

Get our top trading opportunities of 2016 HERE

Read More:

Gold Trades to New Lows, Silver Stays Stubbornly Strong

USD/CAD Technical Analysis: CAD Building Momentum Into LT Support

Technical Focus: EUR/USD - How Does this End?

GBP/USD Weakness to Be Viewed as Opportunity

--- Written by David Song, Currency Analyst

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

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