GBPUSD: Trading the BoE inflation report

It is ‘Super Thursday’ again in the UK. The Bank of England will come out with its latest policy statement, minutes, and the first quarterly inflation report of 2016. 

Heading into the event, we can have a look at the major changes since last quarterly inflation report – 

• Pound dropped – GBP/USD stood at 1.54 on Nov 5 and since then has been on a one way losing streak. The pair clocked a multi-year low of 1.0479 before recovering to 1.44 levels.

• BOE turns dovish, markets indicate rate cut ahead – Carney’s dovish turn from “rates could rise at the turn of the year” to “now is not the time to raise rates” began in November. The BOE is no more on track to raise rates. This is what markets believe. In fact, SONIA forwards indicate a minor chance of a rate cut in the next six months. 

• Negative rates a new normal – ECB pushed deposit rate to -0.30% in December. Bank of Japan surprised markets last week by pushing interest rate to negative territory. The Swiss National Bank too has negative rates. This clearly is turning out to be a new normal for the central banks. BoE rates stand at 0.50%, hence it is worth noting that the bank has room to cut rates before it actually hits negative territory. 

• Markets no longer cheer unconventional policy tools – If the latest reaction to the BoJ negative rates surprise is anything to go by, then the negative rates and other unconventional tools appear to have lost their efficiency. Investors are clearly worried and wonder where we go from here if the negative rates fail to prop up the economy.

Watch: Trade the BoE rate decision with FXStreet - Live Coverage

BoE event scenarios

Scenario	Details	Expected impact on GBP
Dovish	1. Minutes show a 9-0 vote count in favor of keeping interest rates at record lows or 8-1 (1 member in favor of a rate cut)	GBP/USD could began its journey back to latest cyclical low of 1.4079 in case point number 1 and 3 materialize
	2. Inflation and GDP forecasts are revised lower (more likely), slowdown in wage growth noted	By now, Point 2 is well known and priced-in
	3. Carney Indicates readiness to cut rates if required and says committee discussed rate cut.	8-1 vote count (1 member in favour of rate cut) would confirm the BoE has ditched its plans to raise rates
Hawkish	1. 8-1 vote count (slightly hawkish) or 7-2 vote count (more hawkish, but low probability)	8-1 vote count (8 in favor of rates unchanged, while 1 favoring rate hike) would be slightly hawkish and could help Sterling secure a daily close above 1.45
	2. Notes wage growth slowdown, but indicates drop in spare capacity slack and slack in the labor market	7-2 vote count (2 in favor of rate hike) would be shocker and send Sterling higher to 1.4917 (monthly 5-MA)
	3. Carney takes a U-turn again. Says next move likely to be a rate hike. Negative rates/rate cut not under consideration

Note – BoJ has moved to negative territory, while ECB has expressed readiness to do more in March. Markets are pricing-in another deposit rate cut by the ECB in March. Hence, a hawkish outcome is unlikely.

Low inflation, weak GDP are well known facts. Most important is the vote split and Carney’s comments on next policy move. A comment like “the committee discussed rate cut” could spell disaster for Pound even if the vote count remains unchanged at January’s 8-1 split.

____________________________________________________________________

GBP/USD – 4 hour chart shows bullish break from expanding triangle formation

Levels to consider in case of hawkish BoE

Bullish break from the expanding triangle formation has opened doors for upside technical target of 1.4825 – 1.4917 (monthly 5-MA)

However, there are couple of major hurdles on the way higher –

• 1.4587 (falling channel resistance on the daily chart)
• 1.4655 (50% of 1.5230-1.4079)
• And a major hurdle at 1.4786 (38.2% of 1.5930-1.4079)+1.4791 (61.8% of 1.5230-1.4079)

Levels to consider if BoE is dovish

A failure to sustain above the expanding triangle formation would open doors for a drop to rising trend line support (red). 

A dovish outcome could send the pair back to 1.4079 levels. 

However, there are major support levels on the way lower–

• 1.44-1.4410 (rising trend line support 
• 1.4351 (23.6% of 1.5230-1.4079)
• 1.4228 (Feb 1 low)
• 1.4149 (Jan 29 low)