The Musings of Faith

fmfx:

Fundamental Analysis: Interest Rate Decision

The Bank of England (BOE) decision on short term interest rate is due to be published tomorrow (Jan 7). The decision on where to set interest rates depends mostly on growth outlook and inflation. The primary objective of the central bank is to achieve price stability. High interest rates attract foreigners looking for the best “risk-free” return on their money, which can dramatically increases demand for the nation’s currency.

A higher than expected rate is positive/bullish for the GBP, while a lower than expected rate is negative/bearish for the GBP.

Analysts predict that the rate will remain at 0.50%.

(the above analysis via Forexpros)

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Though the rate is expected to remain steady, traders will be looking for sentiment regarding the BoE’s quantitative easing (QE) policy. Any signs of exiting QE will be bullish for the GBP while any signs of prolonging or even extending the QE policy will be quite GBP negative.

I fully expect BoE minutes to be dovish - kinda like what we saw from FOMC - and the market will spike on GBP weakness on its release. The difference, however, is that the markets expect the BoE to be dovish. Market actually expected a more hawkish Fed. So I do not expect GBP weakness to last. The technical outlook poises both the GBP/USD and the EUR/GBP to gain further GBP strength especially as it turns out that the Federal Reserve is not so hawkish anymore and the EU is more debt-burdened and economically fragile than previously thought.

GAME PLAN

I am looking to short the EUR/GBP on any spikes. I have limit orders set up all the way to 0.9100 where a break of this whole number opens up price to the November 30/December 1, 2009 highs at 0.9150. Expect price, however, to find resistance and pause or reverse at 0.9050.

For the GBP/USD, I have limit orders set to buy the pair on GBP weakness. Keep an eye on support levels on cable at 1.5963 and 1.5934, the lows this week. I think GBP/USD will be unable to break and sustainbly hold below these levels and we see the pair rally.

As always, trade what you see, not what I think.