BoE expected to keep interest rates unchanged
The Bank of England will be meeting today for its monthly monetary policy meeting. According to the economists polled, the BoE is expected to keep the interest rates unchanged at 0.25%, while also maintaining its asset purchase program at 435 billion GBP. However, investors will be keen to hear from the central bank on the forward guidance for the UK's interest rates. The British pound enjoyed strong gains over the past few weeks but price looks set for a correction in the near term.
GBPUSD could post a correction
The Bank of England has mentioned in the past that it would hike interest rates gradually from the second half of 2018. However, the latest inflation data showed that consumer prices rose higher in August. The CPI for August came in at 2.9%, just shy of 3%. This is higher than the BoE's inflation target rate of 2%. However, in contrast, wage growth continues to remain weak in the UK. Latest data on wages showed that UK's wages rose at an annual pace of just 2.1% in the three months to August.
The inflation and wage data puts a significant gap between the two metrics, with wages falling behind by 0.8%. Signaling a hike in interest rates is likely to be detrimental to the UK's economic growth as higher interest rates puts further pressure on the UK's household spending activity.
As a result, the Bank of England will need to come out with a cautious statement in order to keep the market expectations in check. The British pound is also reacting to the Brexit events with earlier this week, the rally being fuelled by the UK parliament passing the Brexit law.
How we trade
The price action in GBPUSD suggests further downside on a break below 1.3200. A daily close below 1.3200 will signal further declines as GBPUSD is likely to retrace the recent gains towards 1.3000 support level.
Therefore, it is ideal to go short on GBPUSD at 1.3200 targeting the decline to 1.3000. Stops are placed a few pips above 1.3354, just above yesterdays high. While the BoE meeting can bring some volatility we expect that further gains could be capped in the near term
Entry level: 1.3200
Take profit: 1.3000
Stop loss: 1.3354