Why Is This Event Important:
The Bank of England is widely expected to retain a neutral policy stance in January, and the interest rate decision could spark a bullish reaction in the British Pound as investors scale back speculation for additional monetary easing. However, market participants may show a mixed reaction to the event as we expect the central bank to refrain from releasing a policy statement, and the GBP/USD may consolidate in the days ahead as the BoE is scheduled to release its meeting minutes on January 26.
What’s Expected:
Time of release:01/13/2011 12:00 GMT, 7:00 EST
Primary Pair Impact:GBPUSD
Expected: 200B
Previous: 200B
DailyFX Forecast: 200B
Will This Be Market Moving (Scenarios):
A Bloomberg News survey shows all of the 39 economists polled forecast the Bank of England to hold the benchmark interest rate at 0.50% while maintain its asset purchase target at GBP 200B in December. At the same time, the DailyFX Research Team projects the central bank to maintain its current policy as the central bank aims to balance the risks for growth and inflation., and the MPC is likely to maintain its wait-and-see approach throughout the first-half of 2011 as policy makers expect the tough austerity measures to bear down on economic activity. In light of the recent developments, there could be a growing split within the MPC given the stickiness in price growth, and the central bank may turn increasingly hawkish over the coming months as policy makers expect the recovery to gradually gather pace in 2011.
The Upside
A report by the U.K. Office for National Statistics showed the headline reading for inflation unexpectedly increased to an annualized pace of 3.3% in November to mark the highest reading since May, while the National Institute of Economic and Social Research saw economic activity rising 0.6% during the same period following a 0.5% expansion in October. As growth and inflation accelerates, the BoE may show a greater willingness to gradually normalize monetary policy in 2011, and the GBP/USD may retrace the sharp decline from back in December as investors speculate the central bank to raise borrowing costs later this year.
The Downside
However, as the new coalition in the U.K. withdraws fiscal support and takes extraordinary steps to curb the budget deficit, the tough austerity measures are likely to drag on the real economy, which could lead the BoE to maintain a cautious outlook for the region. In turn, the central bank may retain the option to ease monetary policy further, and the British Pound could face increased headwinds over the coming months as interest rate expectations falter.
How To Trade This Event Risk
Trading the given event risk may not be as clear cut as some of our previous trades as we expect the BoE to refrain from releasing a policy statement, but market participants may show a positive reaction to the rate decision as the central bank drops its dovish outlook for inflation. Therefore, if we see the MPC hold its asset purchase target at GBP 200B, we will need a green, five-minute candle following the announcement to generate a buy entry on two-lots of GBP/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.
On the other hand, the uncertainties clouding the economic outlook paired with the substantial amount of slack within the economy could lead the BoE to adopt a dovish tone for future policy, and speculation for additional monetary easing could set the stage for a short British Pound trade as interest rate expectations deteriorate. As a result, if the BoE surprises the market with an unexpected expansion in QE or lower its outlook for growth and inflation, we will implement the same strategy for a short pound-dollar trade as the long position laid out above, just in reverse.
Potential Price Targets For The Rate Decision
Impact the Bank of England interest rate decision has had on GBP during the last meeting
Period | Data Released | Estimate | Actual | Pips Change (1 Hour post event ) | Pips Change (End of Day post event) |
Dec 2010 | 12/09/2010 12:00 GMT | 200B | 200B | +20 | +22 |
December 2010 Bank of England Rate Decision
The Bank of England held the benchmark interest rate at 0.50% in December while maintaining its asset purchase target at GBP 200B, and the central bank is likely to maintain a wait-and-see approach throughout the beginning of 2011 as it aims to balance the risks for the region. The BoE meeting minutes showed the MPC voted 7-1-1 to maintain its current policy, with board member Adam Posen pushing to expand quantitative easing by another GBP 50B, while Andrew Sentence saw scope to start gradually normalizing monetary policy given the stickiness in price growth. The central bank dropped its dovish tone and said inflation will hold above the 2% target throughout the following year, but went onto say that the “significant” margin of slack within the private sector should “push inflation well below target in the medium term” as the rebound in economic activity tapers off. As the central bank curbs its outlook for growth and expects inflation to remain elevated in 2011, the BoE is likely to maintain a neutral bias going forward, and there could be a growing split within the MPC as the economic outlook remains clouded with uncertainties. |  |
What To Look For Before The Release
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:
Bullish Scenario: 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. | Bearish Scenario: 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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