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Trade Setup Of The Day: GBP/USD Short (March 7, 2013)

GBP/USD has been forming its usual Asian box consolidation prior to the Bank of England interest rate decision. Strong breakouts typically take place during the actual event and the direction depends on the central bank's rhetoric.

Recall that the minutes of the previous monetary policy meeting showed that BOE Governor Mervyn King shifted his stance to a more dovish one as he voted to increase asset purchases back then. However, the hawks still outnumbered the doves at that time, which explains why there was no actual change in monetary policy.

This time around, King could vote in the doves' favor once more and probably convince a few more policymakers to push for further easing. If that's the case, GBP/USD could make a strong breakdown from the 1.5000 major psychological level and sell off by at least a hundred pips, depending on the size of asset purchases.

On the other hand, if there aren't enough votes to increase the BOE's asset purchase program, GBP/USD could spike to the upside during the rate statement. This initial rally might not last very long though as the lack of easing this time could increase the odds of further easing next time. After all, the UK is facing the possibility of a triple-dip recession and has been printing weak economic data lately.

A short trade at 1.4980 until the 1.4800 area or lower with a tight stop above 1.5000 would yield a pretty high reward-to-risk ratio, good enough for a day trade. Stochastic is in the overbought region, suggesting a further move down, while the 1.5000 major psychological support has already been breached.

If price spikes higher during the BOE decision though, possibly because of lack of action or hawkish remarks from incoming head Mark Carney, fading the rally from 1.5050-1.5100 back to 1.5000 could also work as a short-term trade.