GBP and The Bank of England, September 2017



If you're a GBP trader, you already know: the BoE's MPC interest rate decision is due this Thursday.

What should we expect?

Is there a good trade setup into the event?

Let's jump in, but first:

Where We've Been

Back in July, Mark Carney (BoE's governor) surprised the markets by going hawkish out of the blue.

I you remember this time, GBP rose with rage as traders saw a higher change of the MPC hiking rates soon.

This happened because inflation in the U.K. had printed above target for quite some time (think 2.8% vs a target of 2%).

The Central Bank's mandate is to keep inflation in check (close to target, in order to maintain price stability).

Thus, the Bank's policy makers shifted their tone (from a previous dovish one two weeks prior).

What happened next?

In August's meet, the Bank undid those hawkish expectations (GBP went down as bullish traders unwound their positions).

Turns out, while inflation had been high, wage growth had stalled, and Brexit was still clouding Growth forecasts.

As such, the pound got weaker as traders shorted it in line with the negative sentiment.

GBP Now, September 2017

Despite the fact that wage growth still lags inflation, and other fundamental data signal caution, Cable (GBP/USD) has gained recently.

In fact, as I write this Cable sits around 1.32 (a high point in recent history).

Some attribute this to USD weakness (yes, USD has been pummeled, that's true).

But if you look at EUR/GBP, the same story is going on.

And the Euro is as strong as it's been in a while (some could say it was the dovish comments from some officials, but that wouldn't be enough, and this pair has been pressured since last week).

So what's up?

There are several events this week which can lead to GBP appreciation.

These events have most likely already been factored in by savy traders (thus explaining the high pound right now).

What are these events?

1. Brexit Negotiations vote tonight. PM May is expected to pass some EU laws into the UK legal system, thus enabling a much easier divorce from the EU.

The outcome is expected to be positive (good for GBP).

2. U.K. Inflation and Wage Growth data on Tuesday and Wednesday respectively.

U.K. Inflation (CPI) is expected to come in higher than previous (2.8% vs previous 2.6%).

However, high inflation has been the norm for a while now, and this may not move the needle much, we should pay attention to wage growth:

Expected at 2.3% vs previous 2.1%.

If wage growth comes out in line with expectations (or beats expectations), GBP is likely to get a bump.

What's Next for GBP?

Anything can happen, but in my opinion?

There's a good chance the two reasons stated above will fuel a few pound bulls.

Heck, if we get good data, we might even get a slightly different vote breakdown in the MPC.

The vote is expected to come at 2-0-7 (2 for hiking rates, 7 for leaving rates unchanged).

What would be a different breakdown?

3-0-6. Why would this happen?

There were rumors of Haldane possibly voting for a hike.

While this may not be the case, a good outcome from May's meeting, and strong wage growth data could change the MPC's tone this Thursday (in rhetoric and/or votes)

A slightly more hawkish vote breakdown (or tone) would feed pound bulls, hence raising GBP.

Do you have a trade setup?

I would try to trade into the events by going long GBP and placing a Stop Loss below two strong support zones, but not beyond 100 pips (if possible).

Which currency should I pair it with?

That's the issue.

I would recommend buying Cable (GBP/USD) with two caveats:

1. Price is high right now. This is the major reason I haven't bought this pair myself. Had I done it last week, perhaps.

But right now, price is high (by recent price action standards), and as such, going in now would pose a higher losing risk.

2. There is some serious USD upside risk this week.

US CPI is coming out on Thursday, just an hour and a half after the MPC decision.

CPI is the major pain-point for the FED, and as it stands, it is expected to come out at 0.3% vs a previous 0.1% M/M, (and 1.8% vs previous 1.7% Y/Y).

The core is expected to come out slightly below previous.

Now, CPI has disappointed this year, if data comes out in line or slightly below expectations, look for USD to stick to its weakness with a force.

However, if CPI does surprise on the upside...

I don't want to be found shorting USD on Thursday morning (when that report comes out).

As to other currencies to pair GBP with, I'm at a loss.

Both EUR, CAD, and AUD are strong, fundamentally speaking.

While JPY and CHF may spike in the short term (enough days to mess with your trade) with the whole N.Korea drama.

NZD has been pressured recently due to uncertainty regarding General Elections on September 23rd, and a string of bad data.

You could short NZD, but Barclays came out last night saying they would short AUD/NZD this week since they think NZD is too low to be justified by the elections.

Adding to these concerns, we have the aforementioned high price. As such, I would stay out (unless I see a dip)...

And try to get in after a strong positive event has occurred (price breaking through current ranges for the foreseeable future).

That's it. Sorry I didn't include pictures for ya.

Emil Christopher

The Forex Economist

UPDATE: Wednesday, Sep 13th (2 days after I wrote this article):

-PM May got the vote passed (no price reaction).

-CPI came out above expected, the Pound rose sharply.

-Wage growth disappointed, the pound lost some ground (but remained above the 1.3250 level).

At this point, I wouldn't expect BoE to turn more hawkish. Wage growth spoiled the mood too much.





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