Wednesday, August 3, 2011

UK Bank of England (BOE) Interest Rate Decision - August 4, 2011

BOE (Bank of England) will be rendering its interest rate decision today, and it would provide strong volatility in the market if BOE´s final decision turns out to be a surprise, here´s the forecast:

7:00am (NY Time) UK Official Bank Rate 

Forecast 0.50% Previous 0.50%
APF (Asset Purchasing Facility) Forecast 200B Previous 200B

ACTION: GBP/USD BUY 0.75% (Rate) SELL 225B (APF)

The Trade Plan

n the extremely unlikely event BOE hikes rate to 0.75%, we´ll buy GBP/USD immediately on a spike trade. Because of the level of this surprise, I think we´ll see a strong trend change for GBP in the next few weeks, so we should BUY and keep a small portion for larger gains…

On the other hand, if we get a surprise increase in the APF or better known as quantitative easing, it would send a bearish signal to the market, and we should SELL GBP/USD immediately. I´ll be trading this release using my Spike Trading Method.

The Market

UK´s BOE, Bank of England´s Monetary Policy Committee (MPC) is once again scheduled to release their interest rate decision today and the expectations are to keep both their official bank rates at 0.50% and APF (Asset Purchasing Facility) of 200 Billion Pound unchanged, according to the wide majority of economists surveyed by Reuters and Bloomberg.

The important focus as usual will be the accompanying BOE Statement if they decide to release one, and it is customary for BOE to only release a rate statement if there is a change in either the Interest Rate or the APF.

Special Note: The meeting held by the SMPC (Shadow Monetary Policy Committee) on July 18th suggested that MPC should raise rates to 1.00% by a vote of 5-4. The SMPC is a group of independent economists drawn from different background, where they meet once every quarter. Although they do not influence the policies of the BOE’s MPC, their opinions are usually right on target, as they have been sine 1997. It is also important to note that 4 out of the 5 members voted for hikes wanted further hikes, and all 4 that voted unchanged have shown inclination of rate hikes in the near future.

Additional Thoughts

With BOE Gov. King keeping rates at 0.50% throughout the crisis, it could very well cost him his credibility if rates were raised unexpectedly today, especially in a time like this when the economy is struggling. It would be tough to justify that BOE decided to keep rates low while the economy was showing signs of recovery and raise rates when the economy is showing signs of deterioration and possibly falling back into double-dip recession... Therefore, I believe BOE will not act this year, 2011.

Pre-News Consideration

There are no pre-news consideration for this trade.

by Henry Liu