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.
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.