London Calling: The BoE Rate Decision

London Calling: The BoE Rate Decision

Everyone expects the BoE to go to 5.00% this week. My opinion is that this week's BoE increase has been traded back and forth several times already; the 25 basis point increase is already priced in (no big revelation there) and a rate incr of 25 basis points for next time is partially priced in at this price level. What would it mean if the price changes much?

Well, a small to moderate sell off of the GBP between now and thursday indicates to me that more and more traders are pricing out a rate increase for next time and/or a statement that indicates future rate increases could be on hold. There's a decent chance of this happening, as some recent UK fundamentals have been weaker and the price of oil is holding well below $70. (Manufacturing Unexpectedly Stagnated in September as Pound Hurts Exports U.K. manufacturing production unexpectedly stagnated in September as a U.S. slowdown and a strengthening pound eroded overseas sales of goods such as electrical parts). The Fed thinks that our economy will only grow at a "moderate" pace and obviously London is well aware of that.

Here's what I also think: if a large sell-off is seen, it could indicate that traders are thinking not only that rates will hold in the future, but that the BoE just might hold this time. Granted, this is unlikely; the most likely scenario is that the probability for a rate increase for next time will gradually fade and that the GBP will weaken moderately. From today's price action in London, this may already be happening, since the pound did close about 40 pips lower today. I'm placing a small short position ( 30 pip SL representing no more then 3% of my overall account) in the GBP. If the thinking appears to be going along these lines, I'll short some more.

What's also true is that further GBP buying indicates a certain rate rise, continued hawkish statements and a very good probability for a 2nd increase the next time. Information changes all the time and rumors spread quickly, so you have to watch for that.

It goes without saying that as a newstrader, the best thing would be if the price stays about the same and a surprise rate hold occurs, as the pound is totally overbought in this scenario. I think it's possible the pound could lose 150 pips if this were to happen. It would be dream trade and not only because of the price movement that would occur; in this case there would be plenty of time to get in after the announcement and do very well.

I would be looking for the pound to collapse 300 pips in a couple of days in that scenario.

Last month, a rate hike was in the rumor mill and when the decision came out flat, GBP was sold dropping 100+ pips within 3 hours span.

UK's think tank NEISR was clamouring for a 50bp increase. I dont think it is feasible to jump with a 50bp raise this early - it would seriously disturb the economic balance as is.

Likewise, as NewstraderFX already mentioned, high GBP is hurting their export already.

BTW. there is a M&A where a UK company is buying a US company = good for USD.

Actually the NIESR was calling for .25 now and again later...Basically I think the UK traders will have a good feel for how this is going...watching how they trade the GBP should be pretty informative...as I said, the best thing for us as news traders is a surprise one way or the other...

Indeed: 25bp now, 25bp next year.

It would be a surprise to see a 50bp though.

Last month, i was not ready to short GBPUSD and was "surprised" myself when there was no hike. But good thing I did not buy GBP so i ended with no win, no loss. I should have straddled both ways back then!

So far, GBP rate hike has been a surprise! Last time they raised it, I did not understood the implication (was new to news trading back then) and had a lot only for trade.

Is there a "statement" with the UK rate decision? I dont like how FOMC is played. Objectively, a no increase is a no increase so why do we have to beat the bush with a hawkish FOMC statement?

Not exactly sure if a statement follows but I tend to think that there is one. This was what the NIESR said on 10/27:

GDP is forecast to grow by 2.5 per cent this year and 2.6 per cent in 2007.

• Inflation measured by the CPI is expected to be 2.6 per cent per annum in the fourth quarter of 2006, falling back to 2 per cent per annum by the end of 2007.

• The interest rate should rise to 5 per cent per annum next month (11/9) and 5¼ per cent per annum early next year.

The UK economy is set to grow at or just above 2½ per cent per annum both this year and next. Assuming that interest rates are raised to 5 per cent per annum in November and 5¼ per cent per annum early next year, we expect inflation to rise only slightly from its current level before falling back to the target of 2 per cent per annum by the end of next year.

There's only a statement if interest rates are changed. What's also interesting is that the BofE is more forward thinking than some other central banks. They're not like the Fed constantly reacting to last month's data. They set policy in accordance with the quarterly inflation report which they will have seen and discussed before making the decision. So they are not so concerned with inflation last month as with projected inflation over the next year. Remember is wasn't so long ago that everyone was saying they would be cutting rates next but they sat on their hands and in the end it turned out that they were right not to. So maybe there's something in that quarterly inflation report telling them inflation will come down to the 2% target, in which case they may leave rates unchanged.

there is no statement as such but every month notes of the meeting are released (I think a week later) and one of the key things that traders are always looking for is how the panel voted, ie. how many for and against the decision. This is then interpreted as either hawkish or dovish and an indication of what my be decided next time (e.g if decision is 'hold', but some members voted to hike, that's seen as a sign that there may be a hike next time)

NIESR GDP Estimate-7.01 EST Tonight

It's not listed on the FF calender, but it is on others. Here's the one from FXStreet.com:

<TABLE class=mycssTable1 cellSpacing=0 cellPadding=3><TBODY><TR class=mycssEvenRow1><TD> <TABLE class=mycssTable1 cellSpacing=0 cellPadding=3><TBODY><TR class=mycssEvenRow1><TD>Nov 7, 00:01 GMT </TD><TD>United Kingdom </TD><TD>!! GDP Estimate </TD><TD>Prev0.40 % </TD><TD>Con0.50 % </TD></TR></TBODY></TABLE></TD><TD> </TD><TD> </TD><TD> </TD><TD>



</TD></TR></TBODY></TABLE>

I exited my short trade-wish I would have known earlier this was coming out. This is likely to be the final word, not only for the 9th, but the meeting after that as well. Get this number from your news service-it could be a very good trade.

As stated previously, the NIESR is calling for a high enough GDP to necessitate 2 rate increases-to 5.00 now and 5.25 early next year. A reading at or above the .5 consensus is likely to cause some serious movement in the pound. Definately worth taking a look at.

There is a statement issued if rates are changed. This statement is issued at the same time as the decision.

I don't have that on any of my news charts. I still have my short in and wondering if I am needing to close it out.

LONDON (AFX) - The UK economy grew just above its trend rate in the three months to the end of September, a leading UK think-tank estimates.

The National Institute for Economic and Social Research forecasts that the UK economy grew by 0.7 pct over the period from the previous three months, showing that the UK continues to grow 'at or just above' its trend rate -- estimated at around 0.6 pct on a quarterly basis.

The forecasts show that the Bank of England should raise interest rates by a quarter point on Thursday and suggest that rates may need to rise again early next year, NIESR said.

'Our forecast shows that interest rates need to be raised now and probably again in February,' it said.

NIESR's forecast comes despite data released on Monday showing slower-than-expected industrial output growth during September.

Industrial production -- which accounts for around 18.5 pct of the UK economy -- grew by just 0.2 pct in September, lower than expectations for a 0.4 pct rise, while the initial estimates of 0.1 pct monthly rises in July and August were downgraded to show no change.

Because of the modest monthly rise and the downward revisions to July and August, quarterly industrial growth was just 0.1 pct, lower than the 0.3 pct in the initial estimate for third-quarter GDP.

A spokesman for the Office for National Statistics said the new data will take 0.04 pct off the initial 0.7 pct quarterly GDP growth estimate.

Betting on GBPUSD is getting dangerous!

I'd trade GBPJPY instead.

GBP is set for rate hike, while JPY is always happy to stay down.

I'd buy when GBPJPY dips down to 224. I cant be wrong on this one.

NIESR SEPT GDP
Sept .7% .2 higher then consensus and .3 higher then the previous reading.

Short strategy is changed. We could see a repeating pattern emerge once again in London this morning. A 30-40 pip drop, followed with re-newed buying. If you're abale to trade the seesion, serious consideration should be given to buying on this dip. I don't see how London traders can be thinking anything else besides 5.00 this time and .25 again early next year.

Humm......i still have might short in. might consider closing it out. Looks like GBP might turn into a bull. News: do you think it will sell off tonight before we rise again?

That's how fast perception changes. That NIESR provided traders with all the info they need to trade the GBP.

The 2nd rate increase looks a sure thing and that will be driving the GBP now. I got long after the report and placed an order to buy more if it had dropped to 8960. That never happened. Maybe I should have had an order to buy if it rose to the 25 level-guess I missed that one. (I've closed my position at this time-naturally it's only gotten better since I did but what u gonna do...lol).

We do have the mid term elections to get thru and I plan to be on the sidelines watching what happens. Going forward from that, since there is no US data the sentiment is still bullish for the pound. The best thing to see is a 30-50 pip sell off occur over the next London session. This has happened frequently in the past 2 weeks or so. My thinking is to get thru the elections, watch for the dip (not trade for it), see if the level holds and then get long again. If it doesn't sell off and London starts buying, go with that as well.

I really think there is very little chance for a large sell off to occur before tomorrows BoE rate announcement and I don't plan to short cable at least until some time after the BoE. Let's see what happens.

ODD!

While GBPUSD moves up, GBPJPY and USDJPY moves down.
ANd when GBPUSD stalls, GBPJPY and USDJPY moves up?

Its as if JPY strengthens vs GBP every time GBP strengthens vs USD!
And JPY weakens, when GBP is taking a breather!

WTF... how can that be? It does not make sense!

Could it be because of elections? I made 70 pips on the eur/usd today because of the elections.


Its that or im just not following the threads topic.

To that person who said the market factored in the move for the elections last week, look at the market now! 70+ pips in 12 hours, talk about factoring that in the equation from last week!!!

The elections are a definate factor-especially as so many $- fundamentals are lining up at the same time.

Democratic control of both houses is definately percieved as $-...it might be a good idea to check the actual results and trade accordingly. If democratic control doesn't pan out...$ buying then?

MY brother said the same thing..
He told me that with the US election, democrats is expected to win and control both houses making Bush a lame duck president who may not be able to pass any economic bills.

I did not buy that as I dont know how it will work out. Now I know...


Here we go again... GBPUSD stalls and dipping down... GBPJPY is moving up!
Yup you guessed it, I have a long GBPJPY position.