The Bank of England is widely anticipated to hold the benchmark interest rate steady at the record-low of 0.50% as the central bank expects economic activity to improve in the second half of the year, and long-term expectations for higher interest rates could lead the British pound higher as market sentiment recovers.
[U][B]Trading the News: Bank of England Interest Rate Decision[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B]06/04/2009 11:00 GMT, 07:00 EST[/B]
Primary Pair Impact : [B]GBPUSD[/B]
Expected: 0.50%
Previous: 0.50%
[U][B]Impact the Bank of England Rate Decision has had on GBPUSD over the last 2 months[/B][/U]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
May 2009
05/07/2009 11:00 GMT
0.50%
[B]0.50%[/B]
+4
-78
Apr 2009
04/09/2009 11:00 GMT
0.50%
[B]0.50%[/B]
-14
-50
[U]
May 2009 Bank of England Rate Decision
[/U]
The Bank of England held the benchmark interest steady at the record-low of 0.50% in May, and voted unanimously to expanded its asset purchase program by GBP 50B to a total of GBP 125B in an effort to steer the economy out of recession. The BoE minutes showed some of the board members argued ‘for a larger stimulus’ as Governor Mervyn King expects the region to face a ‘slow and protracted recovery,’ with the MPC stating that ‘inflation, in the absence of a further monetary stimulus, could significantly undershoot the 2% target in the medium term.’ As the central bank holds a dovish outlook for future price growth, market participants speculate that the board will use the remaining GBP 25B allotted by the Chancellor of the Exchequer to jump-start the economy as policymakers anticipate the annual rate of inflation to hold below the BoE’s target until 2012.
[U]
April 2009 Bank of England Rate Decision
[/U]
The BoE April minutes showed that the MPC voted 9-0 to hold the key rate at 0.50%, and agreed to carry out the current policies set in place to steer the nation out of a recession. The central bank pledged to spend GBP 75B in asset purchases at the meeting in March as the region faces its worst economic contraction in over half a century, and said that 1Q GDP is likely to contract at ‘a similar rate’ to the 1.6% drop during the fourth quarter. Moreover, the BoE noted that ‘the initial efforts of the committee’s asset purchase program had been encouraging,’ but reinforce a weakening outlook for prices as ‘inflation still seemed likely to fall below’ the 2% target. Nevertheless, the jump in government spending paired with record-low borrowing costs should help to stem the downside risks for growth and price stability however, economic activity is likely to remain subdued throughout the year as the downturn in the global economy intensifies.
[B]What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[U][B]Bullish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on GBPUSD ahead of the data release. [U][B]Bearish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the GBP against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on GBPUSD ahead of the data release.
[B]How To Trade This Event Risk [/B]
The Bank of England is widely anticipated to hold the benchmark interest rate steady at the record-low of 0.50% as the central bank expects economic activity to improve in the second half of the year, and long-term expectations for higher interest rates could lead the British pound higher as market sentiment recovers. At the same time, investors speculate that the central bank will increase its asset purchase program and tap the remaining GBP 25B allotted by the Chancellor of the Exchequer in an effort to stem the risks for deflation. The preliminary GDP reading for the first quarter showed economic activity fell at its fastest pace since 1979, driven by a downturn in private spending and business investments, and the data reinforces a weakening outlook for growth and inflation as David Blanchflower, a former member of the BoE, anticipates jobless claims to average 100K per month ‘for the next year or so.’ Moreover, a report by the Office for National Statistics showed the annual rate of price growth slipped to a 15-month low in April, while retail prices marked the biggest decline since recordkeeping began in 1948, and falling price pressures may lead the BoE to take further steps to shore up the economy as they continue to see a risk for inflation to fall below the 2% over the medium-term. The BoE minutes for the May policy meeting said some members of the MPC argued to increase the asset purchase program by GBP 75B instead of GBP 50B, and lowered their outlook for inflation, stating that they anticipate prices to grow at an annual rate of 0.4% the this year. In addition, the board sees inflation holding below the target rate until 2012, with Governor Mervyn King projecting a ‘slow and protracted recovery,’ and the bank may ease policy further this month in order to jump-start the ailing economy. Nevertheless, the BoE may adopt a wait-and-see approach over the near-term as the monetary and fiscal stimulus begin to work its way through the real economy, and expectations for an economic recovery may lead the central bank to hold a neutral outlook for future policy going forward.
Trading the given event risk may not be as clear cut as some of our previous trades as market participants anticipate the BoE to hold borrowing costs at the record-low but nevertheless, price action following the rate decision could set the stage for a long pound trade as investors maintain long-term expectations for higher interest rates. Therefore, if the central bank keeps rates on hold, and retains its GBP 125B asset purchase program, we will look for a green, five-minute candle subsequent to the rate decision to confirm a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
At the same time, the BoE interest rate decision could instill a bearish outlook for the British pound as policymakers push into uncharted territory, and the downside risks for long-term stability could weigh on the markets as the central bank head sees a risk for a slower recovery. As a result, if policymakers expand its policy for quantitative easing and maintains a dovish outlook for inflation, we will look for sell the Sterling, and we will following the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.
