Trading the News: BoE Announces Rates
What is Expected
Time of release: 07:00 EST, 11:00 GMT 6/07/2007
Primary Pair Impact : GBP/USD
How To Trade This?
The Bank of England rate decision was relatively difficult to trade through its past release, as traders were completely expecting officials to move rates 25 basis points higher through the meeting. Previous announcements were much more straightforward; unchanged rates led to immediate GBP sell-offs. These instances may prove to be much closer analogs to the upcoming report. A Bloomberg News poll shows that 58 of 62 analysts expect the bank to announce no change, but a small minority is still calling for a 25bp rate hike. Such a move would clearly prove bullish for the GBP; otherwise, the currency may reverse recent gains if the announcement comes as expected.
Few people believe that the headline lending rate will go to 5.75 percent through the coming announcement, leaving the GBP to rally on a surprise move. If the Bank does indeed raise rates, the trader may look to go long the GBPUSD on confirmation of an initial rally, setting stops below preceding swing-lows. Profit-taking shall be discretionary, but we recommend that post-news traders use a minimum of 1:1 stop-loss to limit ratios. In other words, aim to make as least as much as you are willing to risk on any given trade.
Unchanged rates would almost definitely lead to a short-term GBPUSD drop, but it is unclear how much extension the currency may see on the lack of a post-announcement communiqué. The Bank of England MPC does not release detailed statements when it leaves monetary policy unchanged, leaving traders to guess the bank?s stance on inflation. The trader may look to go short the GBPUSD on confirmation of a short-term drop, setting stops above preceding swing-highs. Profit-taking shall be almost entirely discretionary, however, as it is difficult to predict how much the GBP may lose on a bearish short-term move. Depending on the severity of the initial drop, it may likewise prove difficult to achieve a 1:1 stop-loss to limit ratio on the trade.