GBP/USD: Trading the Bank of England Quarterly Inflation Report

The Bank of England is likely to retain a neutral tone in its quarterly inflation report as the recovery in the U.K. cools, and the central bank may see scope to maintain its current policy throughout most of 2011 as the economic outlook remains clouded with high uncertainty.

Trading the News: Bank of England Quarterly Inflation Report

What's Expected:

Time of release: 05/11/20119:30 GMT, 5:30 EDT

Primary Pair Impact: GBPUSD

Expected: --

Previous: --

DailyFX Forecast:--

Why Is This Event Important:

The Bank of England is likely to retain a neutral tone in its quarterly inflation report as the recovery in the U.K. cools, and the central bank may see scope to maintain its current policy throughout most of 2011 as the economic outlook remains clouded with high uncertainty. In turn, BoE Governor Mervyn King may continue to talk down speculation for higher borrowing costs in the isle-nation, and the British Pound may continue to threaten the upward trend from earlier this year as interest rate expectations falter. However, as the region skirts a double-dip recession, the central bank may raise its outlook for growth and inflation, and Governor King may show an increased willingness to gradually normalize monetary policy later this year in order to balance the risks for the region.

Recent Economic Developments

The Upside

Release	Expected	Actual
Producer Price Index - Output (YoY) (APR)	5.1%	5.3%
GDP (QoQ) (1Q A)	0.5%	0.5%
Nationwide Consumer Confidence (MAR)	40	44

The Downside

Release	Expected	Actual
PMI Services (APR)	56.0	54.3
Mortgage Approvals (MAR)	48.0K	47.6K
PMI Manufacturing (APR)	57.0	54.6

The economic rebound in the first-quarter could lead the BoE to raise its fundamental assessment for the region, and the central bank may adopt a hawkish tone for future policy as the MPC aims to curb the risk for second rebound effects. However, as manufacturing and service-based activity cools, Governor King may continue to highlight the ongoing weakness in the real economy, and the central bank head may explicit show an increased willingness to maintain the expansion in monetary policy for most of the year as the MPC aims to encourage a sustainable recovery. In turn, the sharp pullback from the yearly high (1.6745) may gather pace going into the end of the week, and the GBP/USD may ultimately break out of the upward from earlier this year as interest rate expectations falter.

Potential Price Targets For The Release

How To Trade This Event Risk

Trading the BoE quarterly inflation report is certainly not as clear cut as some of our previous trades, but the fresh batch of commentary from the central bank could set the stage for a long British Pound trade as investors speculate the MPC to gradually normalize monetary policy later this year. Therefore, if the BoE raises its outlook for growth and inflation, we will need to see a green, five-minute candle following the press conference to establish a buy entry on two-lots of GBP/USD. Once these conditions are met, 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 an effort to lock-in our profits.

On the other hand, the BoE may turn increasingly dovish given the uncertainties clouding the fundamental outlook, and Governor King may continue to endorse a wait-and-see approach for 2011 as growth and inflation in the U.K. cool. As a result, if the central bank tries to squash bets for a rate hike this year, we will implement the same strategy for a short pound-dollar trade as the long position mentioned above, just in reverse.

Impact that the Bank of England Quarterly Inflation report has had on GBP during the last release

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Feb2011	02/16/2011 10:30 GMT	--	--	-83	-51

February 2011 Bank of England Quarterly Inflation Report

Bank of England Governor Mervyn King held a dovish outlook for monetary policy while delivering the central bank's quarterly inflation report and said that “it may be many quarters” before the MPC decides to move the interest rate even as the central bank forecasts price growth to hold above the 2 percent target until the middle of 2012. The BoE sees inflation peaking around 4.4% this year, but sees a risk to undershoot the target as the projections were based on a the interest rate rising to 1 percent by the end of 2011. At the same time, the central bank noted that “there remains a wider range of views than usual” amongst the MPC members, and said that there is a “high degree of uncertainty” clouding the economic outlook following the unexpected contraction in the fourth-quarter. Indeed, the dovish comments from Governor King sparked a bearish reaction in the British Pound, with the GBP/USD slipped to a low of 1.5986 during the North American trade, but the sterling recouped the losses ahead of the close as the exchange rate settled at 1.6090.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com