GBP/USD: 3 Scenarios Surrounding the BoE Statement

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GBP/USD: 3 Scenarios Surrounding the BoE Statement

The GBP/USD fell last week after the FOMC announced an end to QE. Then it traded it more or less sideways for a few sessions. The 1H chart shows the consolidation come to end during the 11/5 session after price fell from 1.6022 to 1.5867. While this signals a bearish continuation, the market was quick provide support for cable and buy it back to to just under 1.60.

GBP/USD 1H Chart 11/5
gbpusd 1h chart 11/5

(click to enlarge)

This sharp pullback puts the GBP/USD back into the previous consolidation range ahead of a key event risk – the Bank of England monetary policy decision and statement due Thursday during the European session/early US session (7:00AM ET). Also note in the daily chart below that price essentially respected the previous low on the year at 1.5875 despite briefly cracking it.

Scenario 1: The GBP/USD breaks above 1.6040. This is a scenario which is likely accompanied by a hawkish BoE. Essentially if the market can believe that the BoE will raise rates before mid-2015, sometime in Q1 or Q2, then the British Pound should find reprieve. If price does push above 1.6040, it will clear above the 200-, 100-, and 50-hour SMAs, and above the consolidation pattern. Meanwhile, the 1H RSI is likely to break above 60, and even 70. If these conditions are met, we should expect a meaningful bullish correction.

With the NFP risk event on Friday, we need to see GBP/USD hold above 1.60 after that, to confirm the bullish intent. The bullish outlook should be limited to 1.62, where we can see a common resistance and the 50-day SMA in the daily chart.

GBP/USD Daily Chart 11/5
gbpusd daily chart 11/5
(click to enlarge)

Scenario 2: Price does NOT break above 1.60, or breaks briefly but returns below it quickly ahead of the NFP. This scenario should accompany a neutral BoE, which makes the USD the driver for cable again. All eyes will then be on the NFP, while GBP/USD remains in the same condition. Then, if price moves and stays above 1.60 after the NFP we can make the same breakout assessment and outlook we made in scenario 1, except with the NFP being the catalyst. However, if price holds below 1.60 after the NFP, look for the test of 1.5875 and a likely break below.

Scenario 3: GBP/USD readily falls below 1.5867. If the BoE England “disappoints” and fails to provide clear forward guidance, the market will likely take the uncertainty to mean that the bank is not ready to raise rates in the first half of 2015. Similarly, if the BoE acknowledges that it will likely remain in a prolong period of low rates, then the market will also expect the rate hike to be pushed back, and also will sell the pound.

Again, we want to wait for the NPF reaction on Friday. Then, If price does not surge back above 1.60 after the NFP, and preferably hold below 1.59, cable will likely be on a bearish continuation attempt. The next key level to monitor might be the 1.5751 resistance pivot in 2013.

GBP/USD Weekly Chart 
gbpusd weekly chart

(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.