How to Trade the BOE Interest Rate Decision

It looks like the pound could be off to an exciting start for the month of August, as the Bank of England (BOE) interest rate decision is scheduled at 12:00 pm GMT tomorrow.

For the newbie traders out there, the BOE rate decision is one of the biggest movers for the British pound, as it dictates the amount of cash in circulation and the level of interest rates in the United Kingdom. I’m pretty sure y’all are excited to figure out how to make pips from this event so let’s take a look at what happened during the previous statement, what’s expected this time, and how GBP/USD usually reacts.

What happened last time?

In the BOE’s July rate statement, Governor Mark Carney made a memorable debut when he adopted forward guidance in saying how long the central bank plans to keep monetary policy unchanged. In fact, he told markets not to expect a rate hike in the next couple of years since it isn’t warranted by recent developments in the economy.

The monetary policy committee meeting minutes released later on revealed that policymakers were in unanimous agreement when it comes to keeping asset purchases and interest rates unchanged.

What’s expected this time?

Based on what BOE Govenor Mark Carney said during his last outing, nobody is really expecting him to announce any major monetary policy changes tomorrow.

At the very least, some are expecting that Carney may express some optimism, as the British economy has been performing slightly better in recent weeks.

Just don’t expect any explicit comments about monetary policy, as you’ll most likely be disappointed. Instead, market participants are anticipating that any hint of forward guidance will come during the quarterly Inflation Report next week instead.

Nevertheless, the BOE rate statement could prove to be a major market mover tomorrow, so we should be prepared for any potential scenario.

How does GBP/USD usually react?

Looking back at the last statement earlier in July, we can see that GBP/USD sold off like ice cream in the middle of summer, due to a combination of everyone buying Greenbacks thanks to the Fed’s plans to taper bond purchases and Carney telling everyone not to expect a rate hike from the BOE over the next couple of years.

GBPUSD

In my opinion, I don’t think we’ll see a similar reaction during this month’s release, as Carney has already revealed policy plans earlier. Still, I’d be on the lookout for a consolidation to form. You can use the report as a catalyst for the break out to either direction and set a reasonable target of 50 pips.

If we do hear any hints of easing (which is unlikely) or of it appears that Carney has a dovish bias, it could send the pound tumbling down the charts and out of consolidation. On the flip side, if Carney is upbeat and highlights improvements in the economy, it could give some support for the pound.