Tomorrow, at 11:00 am GMT, the Bank of England (NYSE:BOE) will go on the wires to announce its decision on interest rates. Because it is one of the main tools that the BOE uses to control monetary policy, it tends to create a hefty impact on exchange rates. If you're into trading the news, then you will not want to miss the event!
Similar to its previous interest rate decision, the market widely expects the BOE to keep rates unchanged at 0.50% and make no adjustments to its 325 billion GBP quantitative easing program.
One reason for this is that the 50 billion GBP stimulus program the BOE implemented in February hasn't expired yet. The program is set to end in May.
The contrasting results between various economic indicators also do little to justify a shift in policy.
On the one hand, we've got very positive leading indicators. Just two days ago, both the manufacturing and construction PMIs beat forecasts and continued to rise above the 50.0 level. Remember, 50.0 is the dividing line between expansion and contraction.
The lagging indicators, however, have disappointed. Last week, the U.K.'s retail sales report came in significantly weaker than expected. Instead of only showing a 0.5% decrease, it reported a 0.8% fall. Furthermore, the final version of the 4Q 2011 GDP report was revised down to -0.3% from -0.2%.
Even though the general public believes that there won't be any changes in monetary policy, there is a possibility that we may see a split in the committee.
In the February and March meetings, Adam Posen and David miles clamored for an additional 25 billion GBP in the bank's quantitative easing program. According to them, the protracted period of weak growth, spare capacity, and unemployment could put a serious drag on inflation. There is a small chance that others may side with them in the upcoming meeting.How can you trade the BOE decision?
If the last two BOE rate decisions are anything to go by, we could see a lot of action even prior to the actual announcement.
You'll notice that on February 9, 2012, the market staged a preemptive rally and rose in anticipation of the rate decision. And after the actual announcement was made, bullishness picked up.
On March 8, 2012, we saw similar market behavior as GBP/USD made its way up the charts ahead of the BOE rate statement. However, the market's reaction to the announcement itself was quite limited.
Judging from these two examples, it seems like buying at the start of the London session and exiting just before the BOE rate decision is a viable strategy. Bold and ballsy, but viable nonetheless.
Be warned though. If the divide between the BOE members grows and more policymakers side with Posen and Miles, it could mean that another round of QE could be implemented once the February program expires in May. This, in turn, could lead traders to price in their dovish expectations, resulting in a strong pound sell-off.