This week UK inflation reached its highest level in more than 5 years. Inflation ticked up to 2.9% which is above the BoE (Bank of England) target. The key reason inflation is rising is clear, it's the weak GBP.
In this post I will need the assistance of our fundamental analyst, Alex Brown. Alex will be supplying the fundamental data for the important BoE event which begins today at 11:00 GMT.
I will first go over the technicals and then the fundamentals.
Today's event does not provide us with a press conference, thus we will have to gather our intelligence from the policy statement.
I want to state it in advance so you don't have the read the whole post to get our trade idea for the BoE meeting. I am bearish on the GBP today and since I am a chartist I will be showing off my skills and predictions with a few GBP charts but I will also cover the FTSE. Let's see if I can get this one right as I did the last 4 trades. (I am feeling lucky!)
The first two charts I will go over are GBPUSD & FTSE 100.
GBPUSD Weekly chart
Looking at the weekly chart we clearly have probably my favorite chart pattern, the mighty head and shoulders. It is about to be completed but I think one more down swing needs to happen before the break above 1.33 happens. Let me make myself clear before I continue, once GBPUSD breaks above 1.33 I will begin buying, probably aggressively.
The trend is up so all I want to do is find opportunities to go long, but as I mention above today I am expecting a weaker GBP, perhaps by 60-100 pips.
Let me summarize GBPUSD: The weekly chart indicates that we are in a strong reversal play, meaning GBPUSD will in the next few days or weeks head much higher. Possibly to 1.45.
In the short-term, hours or days, I believe GBPUSD will drop towards the white dotted trend line before making a move higher in, probably, October.
Today I will look to short the pair but I will trade light, if the BoE surprises to the upside then I will wait for better positioning to go long/short, depending on what they do but my action plan is to short the pound for the meeting.
FTSE Weekly chart
Since the FTSE has a special correlation to the GBP (Strong GBP weak FTSE) due to the fact that over 60% of the income of the 100 FTSE companies comes from foreign money a weaker exchange rate on the GBP sells more goods (increase the demand for the services/products of the UK firms) thus the correlation is clear and it can be seen very well especially after BREXIT.
So in short, if the GBP goes down today the FTSE will go up and it will head towards the yellow dotted line, I don't think it will breach this area and I will look for sell positions around the yellow line. If however the BoE gives strength to the GBP today I will look to short the FTSE once the 7300 support is broken.
Let's go over the fundamentals Alex is providing us with.
UK manufacturing rebounded for the first year. Last Friday the pound rose by 0.79% due to the uptick in UK manufacturing clearly indicating that this is now an important sector but it is also possible that the reason manufacturing is rising is due to a weaker pound, if this is true, it should drop in the next report.
Inflation is at a high level of 2.9% which is higher then the bank of England wanted. It looks unlikely that the BOE will raise interest rates in today's meeting.
BoE head, Mark Carney, has stated that he would wait for inflation to stabilise before raising rates. (So we expect him to vote no today).
Rising rates will decrease the amount of money people can borrow. Therefore people will have less money for spending and the economy will grow slower but in return inflation would drop. (remember, the BoE has too much inflation and is way above it's target).
In the USA people are worried about a rate hike. Similar thinking could be used in the UK as markets are very physiological.
BOE is under pressure to raise interest rates as inflation is at a five year high the cost of living is increasing dramatically due to the high inflation.
The sterling has hit a one year high against the dollars as investors priced in the chance of a rate rise for the first time in 10 years.
So in summary, we expect the BoE to keep its interest rate unchanged at 0.25% with an unchanged vote count of 7-2. This is one of the small meetings without an updated Inflation report and no press conference, so we have to look for any changes to the policy stance in the policy statement. It is not our expectation that the BoE will change its tone significantly, as the economy has developed more or less in line with the expectations set out in the latest Inflation Report on 3 of August , but the BoE may address the weaker GBP. We still expect the bank to remain on hold throughout the Brexit negotiations, which is also what markets have priced in.
We will most likely be shorting GBPUSD for the BoE meeting.
We wish you an excellent trading day and please remember to keep your risk management asymmetric. (risk 1 to get 2+).
All the day traders.