Prepare for Probably the Most Important Rate Decision this Week – The Bank of England is Here with Super Thursday

Posted Wednesday, November 2, 2016 by
Eric Furstenberg • 4 min read

As expected, the FED’s rate decision didn’t cause a lot of volatility today when they kept their interest rate unchanged at 0.5 percent. The FOMC said that US inflation has risen somewhat since earlier this year and that they expect inflation to rise to 2 percent over the medium term. They also noted that the risks to the US economic outlook appear roughly balanced. They said that the case for a rate hike has strengthened, but that they didn’t move yet because they were waiting for more evidence that a rate hike was appropriate. The US dollar strengthened after the release, but it wasn’t a large move like you could have expected from such an important event.


Tomorrow we can expect heavy volatility in the GBP/USD and other pound pairs with the BOE’s rate decision which is at 12:00 GMT. At 12:30 GMT the BOE’s Governor, Mr. Mark Carney will deliver a speech. This could move the market just as much, or even more than the rate decision itself. The BOE has previously mentioned that more easing measures may be implemented in order to support the vulnerable UK economy. In the meanwhile, the UK economy has perhaps performed better than many economists expected, and the weaker pound has also been a great support to the UK economy. The BOE is expected to keep their benchmark rate unchanged at tomorrow’s meeting, so if we perhaps get a hike or a cut tomorrow, the market could react to it with tremendous volatility. Let’s look at a few charts:


GBP/USD Daily Chart


The 20-day exponential moving average kept a lid on the bounce that we saw in this pair today. From a purely technical perspective, the pair is still trading in a narrow range, and today’s pop might be merely a false break out of this range. Tomorrow’s events could catapult this pair out of this range, and traders should be prepared for very large moves tomorrow, not that there will necessarily be large moves, but it can easily turn out to be an extremely volatile day for the pound.

When trading the pound tomorrow and in the days ahead, you need to consider that the US dollar is relatively weak at the moment and that it might not be the perfect currency to pair up with the pound. Look at the following chart:


US Dollar Index Daily Chart


For the readers who are not familiar with this index, it is a composite of four major currencies against the US dollar, namely the Australian dollar, the British pound, the Euro, and the Japanese yen. I like to look at it now and then because it gives me a good idea of the general strength of the US dollar by just taking a quick glimpse at it.


If we analyze this chart carefully, we can see that the US dollar has lost much of its recent bullish momentum. It even traded low enough to print a lower swing low as you can see by the two red rectangles on the chart. The index also closed firmly below the 20-day exponential moving average today, which also indicates that its upward momentum is waning. The US dollar traded lower against all the major currencies today, except for the Canadian dollar.


So how can we play the pound tomorrow? And against which currencies? The Euro has displayed some remarkable strength in the last few days. When we look at the EUR/USD technicals, we need to understand that the pair is still trading in a large range and that it isn’t at all strange to see a bounce like we saw in the last couple of days. Look at the following charts:


EUR/USD Daily Chart


EUR/USD Weekly Chart


The Euro is stronger than the US dollar (relatively speaking) at the moment. Why would we want to sell the pound against the dollar if we could sell it against something that’s stronger than the dollar? Now let’s look at the EUR/GBP:


EUR/GBP Hourly Chart


There is clearly some decent bullish momentum on this pair at the moment, and the price action has been forming higher highs and higher lows as you can see. Now look at an hourly chart of the GBP/USD:


GBP/USD Hourly Chart


Remember that the pound is inversely paired in these two pairs – don’t be fooled by the market direction which looks the same. On the chart above, the pound is strengthening against the US dollar. In the chart above this one, the pound is weakening. So if we want to approach tomorrow with momentum on our side, the EUR/GBP might be preferred above the GBP/USD when looking to play pound weakness. Of course, there are other currencies which might be stronger against the pound than the Euro might be tomorrow, but on this blog, we like to focus on the more liquid currency pairs.


Concerning tomorrow’s news events out of the UK – the pound might feel some pain if the BOE strikes a very dovish tone. It might be even more dramatic if they decide to lower their benchmark interest rate, although this seems to be unlikely. The Brexit theme remains a very large risk to the UK, and there is still a lot of uncertainty about this matter and its consequences for the British economy. Although some economists have expressed their concern about the weaker pound which could push up inflation faster than which is desired, the probability of a rate hike tomorrow is low because the British officials wouldn’t want to stir unnecessary volatility and uncertainty at this time.


Besides the BOE rate decision, the BOE MPC meeting minutes, and Mark Carney’s speech tomorrow, the other important events are the UK services PMI at 09:30 GMT, and the US ISM non-manufacturing PMI number at 14:00 GMT.


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