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GBP/USD Fails to Retain Opening Range- Needs Hawkish BoE for 1.7000+

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by , 05-14-2014 at 05:57 AM (2202 Views)
- Bank of England (BoE) to Provide Updated Growth & Inflation Forecast
- Will BoE Comment on the British Pound?

Trading the News: Bank of England Inflation Report

The Bank of England’s (BoE) Inflation Report may generate fresh highs in the GBP/USD should the central bank show a greater willingness to normalize monetary policy sooner rather than later.

What’s Expected:

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Why Is This Event Important:

The fresh developments coming out of BoE may boost interest rate expectations should the central bank raise its growth and inflation forecast, and Governor Mark Carney may do little to halt the ongoing appreciation in the British Pound as it helps the Monetary Policy Committee (MPC) to deliver price stability in the U.K.

Expectations: Bullish Argument/Scenario

Release Expected Actual
Jobless Claims Change (MAR) -30.0K -30.4K
ILO Unemployment Rate (3M) (FEB) 7.1% 6.6%
Consumer Price Index Core (YoY) (MAR) 1.6% 1.6%

Sticky price growth paired with the ongoing improvement in the U.K. labor market may prompt the BoE to adopt a more hawkish tone for monetary policy, and the GBP/USD may continue to extend the advance from earlier this year should we see a growing number of central bank officials show a greater willingness to raise the benchmark interest rate later this year.

Risk: Bearish Argument/Scenario

Release Expected Actual
Mortgage Approvals (MAR) 72.0 67.1K
Gross Domestic Product (QoQ) (1Q A) 0.9% 0.8%
BBA Loans for House Purchases (MAR) 48950 45933

However, efforts to cool the housing market may limit the BoE’s scope to normalize monetary policy in 2014 as the central bank continues to highlight the persistent slack in the real economy, and the British Pound may face a larger correction in the days ahead should the committee further delay its exit strategy.

How To Trade This Event Risk

Bullish GBP Trade: BoE Adopts More Hawkish Tone- Presents More Detailed Exit Strategy

  • Need green, five-minute candle following an upbeat statement to favor a long British Pound trade
  • If reaction favors buying British Pound, long GBP/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from entry; need at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bearish GBP Trade: BoE Monetary Policy Report Drags on Interest Rate Expectations

  • Need red, five-minute candle to consider a short GBP/USD trade
  • Implement same setup as the bullish British Pound trade, just in the opposite direction

Potential Price Targets For The Release

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  • Fails to Maintain Opening Monthly Range (1.6280); Bearish RSI Break Risks Larger Correction
  • Interim Resistance: 1.7000 Pivot to 1.7030 (100.0% expansion)
  • Interim Support: Interim Support: 1.6400 (61.8% expansion) to 1.6430 (23.6% expansion)

Impact that the BoE Inflation report has had on GBP/USD during the last release

Period Data Released Estimate Actual Pips Change
(1 Hour post event )
Pips Change
(End of Day post event)
FEB 2014 2/12/2014 10:30 GMT -- -- +48 +130

February 2014 Bank of England Inflation Report

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The BoE inflation report is likely to spur volatility in GBP crosses, especially in the context of the current situation with rate expectations. At the last release, Carney said that the BoE sees further rate increases as gradual and limited. At the release we saw the Pound rally as comments indicated that the central bank saw rate increases, although gradual, sooner rather than later. Since then we have seen the appreciating Pound help cap higher inflation and any further indication that expectations have been lowered may weigh negatively on GBP crosses.

--- Written by David Song, Currency Analyst and Gregory Marks


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