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GBP/USD Traders’ Preferred Vehicle on High Risk BoE Decision

GBP/USD Traders’ Preferred Vehicle on High Risk BoE Decision

Talking Points:

  • The BoE rate decision due Thursday at 12:00 GMT is this week's fourth major policy meeting
  • Unlike the RBA, BoJ and Fed decisions before it; the UK policy meeting has scope for surprise
  • Constant Brexit fears will bring market response while traders show preference for GBP/USD

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We have already held our breath through three rate decisions this week - RBA, BoJ and Fed - and all three left the market unfazed. However, we shouldn't grow complacent for the upcoming BoE. Where the Australian, Japanese and US monetary policy groups were looking to keep a steady course with markets fully expecting a steadfast outcome; the Bank of England operates under a different set of assumptions and fears. After the central bank cut rates and introduced its suite of unorthodox monetary policy on August 8th, officials suggested that further easing was likely to follow.

What makes this event truly remarkable though is the market's sensitivity to a constant well of speculation: Brexit. Before the EU referendum signaled the UK's split from the European Union, the BoE issued dire warnings for the local economy and financial system if the 'leave' camp won. The tone didn't change after the fact, and supporters of the movement labeled Governor Carney a scaremonger. Nevertheless, all signs of trouble over the past few months were met with stringent Pound selling. When Carney earlier this week announced he would stay on through the negotiations with the support of Prime Minister Theresa May, the Sterling was heartened. That puts the market in neutral, but it doesn't resolve the importance of and sensitivity to this impending event.

In the rate decision itself, no changes to benchmark or stimulus programs are expected. However, that isn't the only aspect of this event that the market will judge impact on. The Quarterly Inflation Report that accompanies this event will be processed as another high-profile signal on a closely monitored line. Should the BoE hold and lift its expectations for the economy, a relief rally from a discounted currency could be in story. GBP/USD, EUR/GBP and GBP/AUD are well suited to such a development technically. Alternatively, if the fear continues - especially with unexpected easing - a drop in the Sterling will tax an already weak currency; but pairs like GBP/CAD and GBP/JPY can cater to such a scenario. We discuss this event, its scenarios and opportunities in today's Strategy Video.

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