Tamed Bank of England (BoE) Forecasts to Drag on GBP/USD Recovery
- Bank of England (BoE) to Retain Current Policy at First ‘Super Thursday’ Event for 2017.
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Trading the News: Bank of England (BoE) Interest Rate Decision
Fresh projections coming out of the Bank of England (BoE) may shake up the near-term outlook for the British Pound and undermine the recent recovery in GBP/USD should Governor Mark Carney and Co. curb their outlook for growth and inflation.
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Why Is This Event Important:
Fresh forecasts from BoE officials may highlight 'a slightly lower path for inflation than envisaged in the November Inflation Report’ as the central bank continues to assess sterling’s effect on U.K. price growth, and the Monetary Policy Committee (MPC) may stick to the highly accommodative policy stance throughout 2017 especially as the U.K. prepares to depart from the European Union (EU). Nevertheless, Governor Carney may stress ‘there are limits to the extent to which above-target inflation can be tolerated’ as the central bank anticipates a notable increase in price growth, and an unexpected upward revision in the quarterly inflation report (QIR) may fuel a larger recovery in GBP/USD as it boosts interest rate expectations.
Expectations: Bearish Argument/Scenario
|M4 Money Supply (YoY) (DEC)||--||6.2%|
|Mortgage Approvals (DEC)||69.2K||67.9K|
|Retail Sales ex. Auto Fuel (MoM) (DEC)||-0.4%||-2.0%|
The downtick in household spending accompanied by the slowdown in private-sector lending may push the BoE to adopt a more cautious outlook for the U.K. economy, and the sterling stands at risk of facing near-term headwinds should central bank officials show a greater willingness to further embark on the easing-cycle.
Risk: Bullish Argument/Scenario
|Gross Domestic Product (YoY) (4Q A)||2.1%||2.2%|
|Average Weekly Earnings ex. Bonus (3Mo3M) (NOV)||2.6%||2.7%|
|Consumer Price Index Core (YoY) (DEC)||1.4%||1.6%|
However, signs of stronger-than-expected growth paired with the pickup in U.K. wage growth may encourage the MPC to adopt a more hawkish outlook for monetary policy, and an unexpected upward revision to the quarterly inflation report may heighten the appeal of sterling as market participants scale back bets for additional monetary support.
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How To Trade This Event Risk(Video)
Bearish GBP Trade: BoE Reduces Growth & Inflation Forecast
- Need red, five-minute candle following the rate-decision to consider a short GBP/USD position.
- If market reaction favors a short sterling trade, sell 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 Shows Greater Concern for Inflation Overshoot
- 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
Chart - Created Using Trading View
- GBP/USD may make a more meaningful run at the December high (1.2775) as it breaks above the January high (1.2674) following the Federal Open Market Committee (FOMC) interest rate decision, but the broader outlook remains tilted to the downside amid the deviating paths for monetary policy.
- Interim Resistance: 1.2915 (September low) 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||Pips Change|
|12/15/2016 12:00 GMT||0.25%||0.25%||-31||-68|
December 2016 Bank of England (BoE) Interest Rate Decision
Chart - Created Using Trading View
As expected, the Bank of England (BoE) kept the benchmark interest rate at the record-low of 0.25% at its last interest rate decision for the year, with the central bank largely endorsing a wait-and-see approach going into 2017 as officials reiterate ‘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.’ Nevertheless, Governor Mark Carney and Co. warned the current data prints points to a ‘a slightly lower path for inflation than envisaged in the November Inflation Report,’ but it seems as though the central bank is in no rush to further embark on its easing cycle as the Monetary Policy Committee (MPC) argues ‘there are limits to the extent to which above-target inflation can be tolerated.’ More of the same from the BoE sparked a lackluster reaction in GBP/USD, with sterling edging lower throughout the North American trade as the pair ended the day at 1.2415.
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--- Written by David Song, Currency Analyst
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