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Talking Points:

- Tomorrow brings the Bank of England’s Super Thursday, which means that tomorrow’s rate decision will be accompanied with updated Quarterly Inflation Forecasts as well as a press conference after the meeting.

- Will the BoE guide inflation forecasts higher? And how will the BoE look to handle higher rates of inflation in the future? Are we near a potential rate hike out of the BoE, as alluded to in June? All are questions that traders will be looking for answers around tomorrow.

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Tomorrow brings the Bank of England’s Super Thursday, which means that tomorrow’s rate decision will be accompanied with updated Quarterly Inflation Forecasts along with a press conference after the meeting. The big question here revolves around the BoE’s stance on inflation: How much inflation is the bank expecting in the near-future and how quickly will they adjust rates in response to higher rates of inflation moving-forward?

As we came into the year, the BoE seemed rather passive on both fronts; but as inflation has continued to tick-higher, we’ve started to see a growing dissent within the BoE from MPC members that are looking for a rate hike. In June, inflation from the month of May printed at 2.9% - above the 2.7% print in April and well-above the BoE’s 2% inflation target. At the rate decision following that inflation print, the BoE voted 5-3 to hold rates, and those three dissenting votes were the most votes for a rate hike out of the BoE since 2011. Later in the month, Bank of England Governor Mark Carney said that rate hikes may be on the horizon, and this started the bullish move in GBP as Cable traded-above the vaulted 1.3000 figure.

Inflation in July was a bit more subdued, coming in at 2.6%, and seemingly removing a bit of pressure from the situation. We’ve also seen a change within the MPC, as one of the more vociferous voices looking for a rate hike will no longer be casting votes, as Ms. Kristin Forbes has completed her three year term as of June 30. This is noteworthy, as Ms. Forbes was the first dissenting vote looking for a rate hike post-Brexit at the bank’s meeting in March, accompanying that vote for higher rates with an op-ed in The Telegraphto explain the logic behind her decision. With one of the driving forces looking for tighter policy leaving the bank, will we see the BoE ramp-up hawkishness at tomorrow’s meeting? This can be seen in either a) higher rates of inflation expected within the BoE’s QIF or b) a diminished tolerance to higher rates of inflation in periods looking-forward, which will likely be a highly subjective interpretation deduced from Mr. Carney’s press conference.

The British Pound is rallying as we approach tomorrow’s meeting. GBP/USD is currently working on fresh ten-month highs, breaking above the 38.2% retracement of the ‘Brexit move’ in the pair.

GBP/USD Daily Chart: Cable Rallies to Ten-Month Highs

GBP Strength Shows Ahead of BoE Super Thursday

Chart prepared by James Stanley

On a shorter-term basis, Cable has been rallying in a rather consistent fashion, forming into a bullish trend-channel over the past couple of weeks as the pair has broken-out to those fresh ten-month highs. This can help traders looking to trade bullish momentum approaches, and if Cable does begin to show a pullback in the recent top-side trend, the three potential support areas on the chart below can help to look for ‘higher low’ support in the effort of trading bullish continuation.

GBP/USD Hourly Chart: Bullish Trend Channel with Potential Support Applied

GBP Strength Shows Ahead of BoE Super Thursday

Chart prepared by James Stanley

Stripping out the U.S. Dollar can change matters a bit, as the drubbing seen in USD throughout 2017 has been at least partially responsible for that run of strength in GBP/USD. But even against the Japanese Yen, the British Pound continues to show strength as the pair is moving-up towards a key resistance level. In mid-December, just before the Fed’s rate hike in the middle of the month, GBP/JPY set a fresh post-Brexit high at 148.46. After subsequent attempts to take out that high failed in May and again in July, GBP/JPY has formed into an ascending wedge formation when adding in the bullish trend-line from the ‘flash crash’ lows in the pair.

GBP/JPY Daily: Ascending Wedge Building

GBP Strength Shows Ahead of BoE Super Thursday

Chart prepared by James Stanley

The zone of resistance around 148.46 is extremely interesting, as the high that was set in December of 2016 remains after attempts to take the level out in May and again in early July faltered. This leads to the expectation that if we are able to see this zone of resistance yield, an extended run may be on the horizon as there is little standing in the way of the 150.00 psychological level.

GBP/JPY Daily: Zone of Resistance Produced from 2017 Lower-Highs

GBP Strength Shows Ahead of BoE Super Thursday

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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