The Bank of England is widely expected to hold the benchmark interest rate at 0.50% and is likely to maintain its GBP 175B asset purchase program as the board anticipates economic activity to improve throughout the second-half of the year, and the central bank may adopt a neutral policy stance going forward as the extraordinary efforts work their way through the real economy.
[B][U]Trading the News: Bank of England Interest Rate Decision[/U][/B]
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What’s Expected[/U][/B]
Time of release: [B]09/10/2009 11:00 GMT, 07:00 EST[/B]
Primary Pair Impact[B] : GBPUSD[/B]
Expected: 0.50%
Previous: 0.50%
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Impact the Bank of England Rate Decision has had on GBPUSD over the last 2 months[/U][/B]
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[U]August 2009 Bank of England Interest Rate Decision[/U]
The Bank of England held the benchmark interest rate at 0.50% and unexpectedly expanded its asset purchase program by GBP 50B to GBP 175B to shore up the ailing economy, and the central bank may continue to ease policy throughout the second half of the year in an effort to foster a sustainable recovery. At the same time, BoE Governor Mervyn King voted to increase the scope of the program to GBP 200B as the outlook for growth and inflation remains weak, and the cautious tone held by the central bank head may continue to weigh on the exchange rate as investors weigh the outlook for future policy. As households continue to face a weakening labor market paired with tightening credit conditions, the slump in private-sector spending is likely to weigh on economic activity going forward, and policy makers are likely to hold a dovish outlook as the BoE anticipates price growth to hold below target over the next three-years.
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July 2009 Bank of England Interest Rate Decision[/U]
The central bank in the U.K. held borrowing costs at the record-low and maintained its GBP 125B asset purchase program in an effort to steer the nation out of recession, and policy makers may take additional steps to foster a sustainable recovery as the outlook for growth and inflation remains weak. As a result, market participants speculate the Bank of England will utilize the remaining 25B allotted by the Chancellor of the Exchequer Alistair Darling in an effort to soften the landing of the ailing economy, and expectations for further easing is likely to weigh on the exchange rate over the coming months as the board maintains a dovish policy stance. Nevertheless, the International Monetary Fund raised its growth outlook for the U.K., and forecasts economic activity to fall at a slower pace this year, with GDP anticipated to expand at an annual rate of 0.2% in 2010.
[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:
[B][U]Bullish Scenario:
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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.
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How To Trade This Event Risk[/B]
The Bank of England is widely expected to hold the benchmark interest rate at 0.50% and is likely to maintain its GBP 175B asset purchase program as the board anticipates economic activity to improve throughout the second-half of the year, and the central bank may adopt a neutral policy stance going forward as the extraordinary efforts work their way through the real economy. The preliminary GDP reading showed the economy contracted 0.7% in the second quarter versus an initial forecast for a 0.8% drop in the growth rate, with private and public spending crossing the wires stronger than expected, while price growth unexpectedly increased at an annual rate of 1.8% for the second consecutive month in July following the expansion in monetary and fiscal policy. Moreover, a report by the National Institute of Economic and Social Research showed the GDP forecast increased 0.2% in August to mark the first rise since May 2008, while the International Monetary Fund raised its growth outlook for the nation and expects the economy to expand at an annual rate of 0.2% in 2010, and the improvement in the economic landscape may lead the BoE to implement a wait-and-see approach as policy makers anticipate the growth rate to rise going into the following year. At the same time, a report by the BoE showed consumer credit slipped 0.2B in July, which is the biggest decline on record, with the annual rate of unemployment jumping to a 14-year high during the same period, and policy makers may take further steps to stem the downside risks for economic growth as households continue to face a weakening labor market paired with tightening credit conditions. The minutes of the July meeting showed the MPC voted 6-3 to expand the program, with Governor Mervyn King, Timothy Besley and David Miles pushing for a GBP 75B expansion to GBP 200B in an effort to mitigate the risks for a slower recovery, and the central bank head may push to increase the scope of the asset purchase scheme over the coming months in order to foster a sustainable recovery. Meanwhile, former board member David Blanchflower expects the BoE to expand quantitative easing by November as the recovery remains ‘fragile,’ and dovish commentary follow the rate decision is likely to weigh on the exchange rate as investors scale back long-term expectations for higher interest rates.
Trading the given event risk may not be as clear cut as some of our previous trades as the MPC retains a cautious tone but nevertheless, as investors anticipate the Bank of England to tighten policy over the next 12 months, long-term expectations for higher borrowing costs may drive the British pound higher as market participants speculate the central bank to hold a neutral policy stance going forward. Therefore, if the central bank limits the asset purchase program to GBP 175B and holds an improved outlook for growth and inflation, we will look for a green, five-minute candle following the release to generate a buy entry on two-lots of GBP/USD. 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 objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first target reaches its target in order to preserve our profits.
In contrast, the slump in global trade paired with the downturn in the labor market is likely to weigh on the outlook for growth and inflation, and fears of a slower recovery may lead the BoE to ease policy further in an effort to jump=start the ailing economy. As a result, if the MPC expands the scope of its asset purchase program to GBP 200B or higher, we will favor a bearish forecast for Cable, and will follow the same setup for a short pound-dollar trade as the long position mentioned above, just in reverse.
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