GBP/USD Rebound Vulnerable to Dovish BoE Inflation Report

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- Bank of England (BoE) Widely Expected to Reduce Growth Inflation Forecast.

- Will the BoE Inflation Report Drag on Interest-Rate Expectations

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Trading the News: Bank of England (BoE) Inflation Report

Trading the Bank of England (BoE) Inflation report may not be clear cut even with expectations for a downward revision in the central bank’s growth/inflation forecast as Governor Mark Carney continues to prepare U.K. households and businesses for higher borrowing-costs.

What’s Expected:

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Why Is This Event Important:

The fresh batch of central bank rhetoric may continue to drag on interest rate expectations as the majority of the Monetary Policy Committee (MPC) remains in no rush to normalize monetary policy but the BoE may stick to its current course to raise the benchmark interest rate in 2015 amid the ongoing recovery in the real economy.

Expectations: Bearish Argument/Scenario

Easing inflation along with the slowing consumption may encourage the BoE to adopt a more dovish tone for monetary policy and GBP/USD may continue to carve lower highs & lows throughout the remainder of the year should the central bank scale back its willingness to remove the highly accommodative policy stance.

Risk: Bullish Argument/Scenario

However the BoE may largely retain an upbeat view for the U.K. economy amid the rise in business outputs paired with the ongoing improvement in the labor market and the British Pound may continue to pare the losses carried over from the previous month should the fresh batch of central bank commentary prop up interest rate expectations.

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How To Trade This Event Risk(Video)

Bearish GBP Trade: Interest Rate Expectations Falter as BoE Cuts Economic Forecast

• Need red five-minute candle following the GDP print to consider a short British Pound trade
• If market reaction favors bearish sterling trade short GBP/USD with two separate position
• Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
• Move stop to entry on remaining position once initial target is hit set reasonable limit

Bullish GBP Trade: MPC Stays on Course to Raise Interest Rate in 2015

• Need green five-minute candle to favor a long GBP/USD trade
• Implement same setup as the bearish British Pound trade just in reverse

Potential Price Targets For The Release

GBP/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

• Downside targets remain favored as GBP/USD continues to carve lower-highs while RSI fails to establish bullish trend.
• Interim Resistance: 1.5980 (100% expansion) to 1.6000 (50.0% retracement)
• Interim Support: 1.5720 (61.8% retracement) to 1.5740 (38.2% expansion)

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Impact that the U.K. GDP report has had on GBP during the last release

August 2014 Bank of England (BoE) Inflation Report

In the latest Inflation Report the Bank of England (BoE) raised its 2014 growth forecast to 3.5% from 3.4% but went onto say that now is not the time for a U.K. rate increase as the central bank slashes its wage growth outlook. Indeed BoE Governor Mark Carney stated that the forward-guidance for monetary policy remains unchanged amid the reduction in spare capacity but concerns over weak wage growth muted exports and heightening geopolitical tensions may continue to dampen the appeal of the British Pound as it drags on interest rate expectations. The sterling tumbled lower on the back of the relative dovish BoE statement with GBP/USD slipping below the 1.6700 handle during the North America trade to close at a low of 1.6678.

--- Written by David Song Currency Analyst and Shuyang Ren

To contact David e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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