Few U.K. events can shake up the British pound as much as the MPC rate decision. It can lead to large, wild swings, and it can even affect pound price action over the course of a few days.
That being said, it would be crazy for you to trade the pound tomorrow without a clue as to what the Bank of England (BOE) may say or do. So if you’re reading this now, I’d like to congratulate you – you’re on the right track!
Last month, the MPC decided to keeps its interest rates and asset purchase facility unchanged as the U.K.’s sticky inflation situation made policymakers wary of increasing its stimulus package.
This time around, if forecasts are to be believed, we may just get a repeat of last month’s decision. After all, inflation HAS been stubbornly high in recent months, recently clocking in at 3.5% in March. Remember, the BOE’s February forecasts saw inflation at 3.35% in the first quarter of 2012, so the central bank is obviously already off its mark.
Also, with Adam Posen abandoning the call for more stimulus, David Miles stands alone as the sole MPC member pushing for more asset purchases. David Miles ain’t the Hulk; he can’t get it done on his own!
Then again, Miles isn’t the only one who thinks the U.K. could use another boost. There are some analysts who think we could see a surprise increase in asset purchases tomorrow. They argue that unlike the economic reports we saw last month, recent leading indicators such as manufacturing and services PMIs have fallen short of expectations.
That the U.K. dipped back into recession last quarter also led to calls for more stimulus as it dealt a huge blow to consumer and business confidence.
If forecasts turn out to be accurate and the MPC ends up keeping its rates and asset purchases unchanged, then we better prepare for possible trade setups! Luckily, the last two releases provide us with clues on how to trade GBP/USD, one of the most traded pairs at the release of the MPC’s decision.
March 8, 2012
Last March 8 investors were already expecting the central bank to not only keep its rates at 0.50%, but also leave its asset purchases unchanged. As a result, pound traders focused on risk sentiment, which was in favor of pound bulls at the time.
The pair shot up to its week open price area before profit taking ahead of the decision dragged the pair to the 50% Fib level. Not surprisingly, reaction to the report was muted. Pound bulls soon resumed their pursuit, which pushed GBP/USD near its intraday highs.
April 5, 2012
More than a few traders were out for an early Easter weekend last April 5, so GBP/USD traded in a tight range in the Asian session. This is also probably why Cable had a strong reaction to the weak manufacturing report released a few hours before the MPC decision.
The pair had already dropped below the 1.5850 handle before a no-change MPC decision boosted the price by 50 pips in the first hour of the release. As it turned out, it was only a retracement as the pair soon went back down to end the day near its intraday lows.
Based on the charts above, we can assume that unless the MPC drops bombs in its statement this month, we can expect a muted market reaction on Cable. Still, this doesn’t mean that you shouldn’t keep close tabs on pound pairs! You never know when a valid trade idea will show up!