Trading the News:Bank of England Interest Rate Decision

What’s Expected:

Time of release:11/10/201112:00 GMT,7:00 EST

Primary Pair Impact:GBPUSD

Expected:275B

Previous:275B

DailyFX Forecast:275B

Why Is This Event Important:

The Bank of England is widely expected to keep the benchmark interest rate at 0.50% while maintaining its asset purchase program at GBP 275B, and currency traders may overlook the decision should the central bank refrain from releasing a policy statement. However, we may see the BoE may surprised the market once again and take additional steps to shore up the ailing economy in an effort to stem the risk of a double-dip recession. As the central bank sees an increased risk of undershooting the 2% target for inflation, the MPC may carry its easing cycle into the following year, and the committee may continue to ramp up its asset purchases in order to balance the risks for the region. On the other hand, BoE officials may endorse a wait-and-see approach as we see positive developments coming out of the U.K., and the sterling may continue to face range-bound price action in the coming days as market participants weigh the prospects for future policy.

Recent Economic Developments

The Upside

Release	Expected	Actual
Gross Domestic Product (QoQ) (3Q A)	0.3%	0.5%
Retail Sales ex Auto Fuel (MoM) (SEP)	0.2%	0.7%
Consumer Price Index (YoY) (SEP)	4.9%	5.2%

The Downside

Release	Expected	Actual
Industrial Production (MoM) (SEP)	0.1%	0.0%
Purchasing Manager Index Manufacturing (OCT)	50.0	47.4
GfK Consumer Confidence Survey (OCT)	-30	-32

The above-forecast print for growth and inflation may encourage the BoE to soften its dovish tone for monetary policy, and we may see the British Pound recoup the losses from earlier this month should the central bank talk down speculation for more QE. However, the slowdown in business outputs paired with the drop in confidence may lead the BoE maintain a cautious outlook for the region, and the committee may keep the door open to expand monetary policy further in an effort to keep the economy from slipping back into a recession. In turn, the MPC may show an increased willingness to expand the asset purchase program beyond the GBP 275B target, and the sterling may give back the rebound from 1.5273 as interest rate expectations falter.

Potential Price Targets For The Rate Decision

How To Trade This Event Risk

Trading the BoE interest rate decision may not be as clear cut as some of our previous trades, but positive comments coming out of the BoE should set the stage for a long British Pound trade as market participants scale back expectations for additional monetary support. Therefore, if the central bank softens its dovish tone for future policy, we will need a green, five-minute candle following the rate decision to establish a buy entry on two-lots of GBP/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

In contrast, the MPC may highlight the threat of a double-dip recession as the region copes with a slowing recovery, and the central bank may keep the door open to ease policy further in an effort to balance the risks for the region. As a result, if the BoE talks up speculation for more QE, we will carry out the same setup for a short pound-dollar trade as the long position mentioned above, just in reverse.

Impact that the Bank of England Interest Rate Decision has had on GBP during the last meeting

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
OCT 2011	10/06/2011 11:00 GMT	200B	275B	-169	-25

October 2011 Bank of England Interest Rate Decision

Although the Bank of England kept the benchmark interest rate at 0.50%, the central bank surprised the market by increasing its asset purchase program to GBP 275B from GBP 200B in an effort to shield the U.K. economy. Indeed, the BoE lowered its forecast for growth in light of the slowing recovery, and we may see the central bank ease monetary policy further over the coming months as the MPC sees an increased risk of undershooting the 2% target for inflation. As Britain faces a growing risk of slipping back into a recession, we may see the committee carry its easing cycle into 2012, and the bank may keep borrowing costs at the record-low for a prolonged period of time in order to balance the risks for the region. The British Pound tumbled lower following the rate decision, with the GBP/USD slipping back below 1.5300, but the sterling regained its footing during the North American trade as the exchange rate settled at 1.5442 at the end of the day.

--- Written by David Song, Currency Analyst

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