What if the BoE…?

August 4, 2016

Bank of England tonight!

With Carney expected to cut the 0.5% rate to 0.25% to avoid a Brexit recession after being untouched since March 2009, there are still plenty of questions to be asked.

From the News Terminal:

BoE rate decision details from the Vantage FX News Terminal

But with rates already at record low levels, the effectiveness of monetary policy alone has been called into question. To combat this, further stimulus is on the table in the form of QE and the government is being talked into a ramp up on spending on the fiscal side.

Now with QE already failing to kick-start the flailing, post-Brexit economy and the political dangers that come with rash spending in modern day politics, the effectiveness of stimulus is equally as questionable in today’s economic landscape.

Our Daily Market Update following the July BoE decision was of course overshadowed by the Nice Attack, but with expectations for a cut high, we had this to say following the on hold decision:

“So this decision all but means that markets know that next month is go for a cut, and if the market was short expecting a cut now, how can you possibly be bullish the pair going forward? Well, bar a change in rhetoric from the Fed which we clearly aren’t going to get.”

Comparing the chart in that post from one month ago and we see price moved barely 300 pips lower (a relatively nothing move over an entire month) before settling pretty much exactly back where we were following the on hold decision:

GBP/USD 4 Hourly:
GBP/USD before the BoE Rate Decision
Click on chart to see a larger view.

With Carney having made it profusely clear even before Brexit that the BoE would have to cut, the market had more than priced in this move months ago. The fact that price has held steady down here for so long is somewhat of a surprise, but following that 2000+ pip Brexit bloodbath, some sort of consolidation is the least we can expect.

The Brexit drop has wreaked havoc on the charts which makes the pair so much harder to trade. The levels on Cable just aren’t there at the moment and it’s making managing risk around today’s rate decision tough. The 0.25% cut is coming and priced in, but there is one more question to be asked.

What if the BoE goes all in and slashes rates down to 0.00% in one foul swoop?

This question is why there is still some meat on the bone for Cable shorts and why the contrarian long isn’t being pounced on. This would certainly be one juicy trade if the BoE delivered!

Aussie Data First:
The blog is running a bit late today so any chat about Aussie Retail Sales during Asia wont be too valuable for traders.

AUD/USD 15 Minute:
160804_audusd_15minute
Click on chart to see a larger view.

The Aussie continues to rally following the RBA interest rate cut but the easy trade continues to slip further away.

There are definitely safer, easier and potentially more profitable setups out there. You just have to look!

———

On the Calendar Thursday:
AUD Retail Sales m/m

GBP BOE Inflation Report
GBP MPC Official Bank Rate Votes
GBP Monetary Policy Summary
GBP Official Bank Rate
GBP BOE Gov Carney Speaks

USD Unemployment Claims

Make the switch to Vantage FX.

Dane Williams – @VantageFX

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