GBP/USD: Trading the Bank of England Interest Rate Decision

The Bank of England is widely anticipated to hold their benchmark interest rate steady at the record-low of 0.50% in August as the U.K. economy remains in contraction but is showing signs of stabilizing.

[B][U]Trading the News: Bank of England Interest Rate Decision

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[B][U]What’s Expected[/U][/B]

Time of release: [B]08/06/2009 11:00 GMT, 07:00 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]

Expected: 0.50%

Previous: 0.50%

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[B][U]Impact the Bank of England Rate Decision has had on GBPUSD over the last 2 months[/U][/B]
[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]

                                                     July 2009

                                   07/09/2009   11:00 GMT

                                   0.50%

                                   [B]0.50%[/B]

                                   +76

                                   +155

                                                     June 2009

                                   06/04/2009   11:00 GMT

                                   0.50%

                                   [B]0.50%[/B]

                                   -248

                                   -211

                         
                             
    [U]July 2009 Bank of England Rate Decision[/U][U][/U]                                                                                                                                            

                                     The Bank of England left its benchmark rate unchanged at 0.50% in July  stating that ``Little evidence had emerged since May to change the committee's views about the broad shape of the prospects for the economy in the medium term, although the downside risks to gross domestic product in the near term had probably diminished.'' The MPC also refrained from adding to their quantitative easing program waiting until they review it in August . Markets had widely expected an additional £25 billion and the lack of action was viewed as a bullish sign for the economy. Waiting for the second five minute candle to determine a reaction as we were focused on the minutes rather than the decision we would enter a long GBP/USD trade that would good for at least 75 pips in profit.

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[/U][U][U]June 2009 Bank of England Rate Decision
[/U][/U]

                                     The central bank in the U.K. kept the benchmark interest rate unchanged at 0.50% in June, and maintained its GBP 125B asset purchase program in an effort to stimulate the ailing economy. The Bank of England minutes showed the board voted unanimously to carry out its current policy objects in place, with the MPC stating ‘that the second-quarter decline in consumption would be less than the committee had previously anticipated.’ Moreover, the BoE said that the economic downturn has ‘receded  somewhat,’ with the housing market ‘stabilizing,’ and the comments encourage an improved outlook for Europe’s second largest economy as policymakers anticipate an economic recovery later this year. As a result, Governor Mervyn King may continue to keep a floor on borrowing costs as growth prospects improve, and long-term expectations for higher interest rates may continue to drive the British pound higher over the near-term.

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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:

                                      [B][U]Bullish Scenario:[/U][/B][B][U]

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         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.

                                   [B][U]Bearish   Scenario:[/U][/B]
         
         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 their benchmark interest rate steady at the record-low of 0.50% in August as the U.K. economy remains in contraction but is showing signs of stabilizing. Indeed, industrial production in June unexpectedly rose by 0.5% as manufacturing output increased by 0.4%. A 1.1% increase in the mining and oil components reflect the improvement in the global economy which has fueled demand for commodities. The service sector which accounts for nearly 70% of GDP expanded for a third month according to the PMI survey which rose to 53.2. Adding to optimism is the stabilization of the housing sector which has seen prices rise the past three months and mortgage approvals over the last five as thawing credits markets have helped boost demand. The central banks is completing its asset purchase program which included buying mortgage backed paper in an effort to boost liquidity. The MPC stated at the last policy meeting that they would review the program and determine if additional measures were needed when they convened in August. Therefore, traders will be focusing on the post decision statements which could generate significant volatility as we saw last month when the BoE refrained from adding to the plan. However, lending standards remain tight for consumer and small businesses which could jeopardize a recovery and lead the central bank to look to provide further liquidity. .

The pound has seen strong support in recent trading on the back of increasing risk appetite and the improving fundamental data. Therefore, if the MPC keeps rates on hold and announces an end to its program for asset purchases, we will look for a green, five-minute candle following the rate decision to confirm a buy entry on two-lots of GBP/USD. However, we would also take our cue from the second candle as the statements take time for traders to decipher at times. Once these conditions are met, we will place our initial stop at the nearby swing low, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objected will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

Concerns remain that the lack of consumers consumption could limit future growth and the lack of access to credit will only encourage them to remain retrenched. Therefore, if the BoE extends their asset purchase program , we will favor a bearish outlook for Cable, and will follow the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

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