Why Interest Rates Matter in Forex Trading
In our last Interest Rate Blog, we provided key trading levels and strategies for How to trade the Federal Reserve Interest Rate Decision. The opportunities presented in this blog generated our readers many pips.
Traders and investors look at those trying to anticipate fx market movements to make profits.
Whether you are a trader or not, a Central Bank Rate decision is directly linked to your life as it may affect the country’s economy, employment and inflation hence may affect your day to day life and activities.
I am sure that if you are reading this text, you probably know all that and the question you want an answer for is:
How Can I Take Advantage Myself Of The Bank Of England’s Rate Decision?
If you are planning to trade this event, you have to take some factors into consideration first. The first one of them is to have a clear picture of what happened in the last Central Bank Rate decision.
Let’s recap on that
The members of the BOE committee kept interest rates unchanged again at a record low and cut its forecasts for growth and wages as it warned that Brexit was weighing on the economy. The discouraging perspective for the next two years further reduced speculation that the Central Bank was close to its first rate increase in a decade. However, BOE’s Governor Mark Carney said of the possibility of one hike in 2018 which was still under the radar. He mentioned the uncertainty about Brexit (especially lower investment by companies) meant the economy could not grow as fast as before without pushing inflation higher. Therefore, just some improvement in growth could bring forward a rate hike.
Let’s Find Out How To Trade The Rate Decision
Before even considering any trade, remember the Platinum Methodology states that every single trade needs to have the following:
Logical View + Fundamental View + Technical View + Perfect Stop Loss + Perfect Entry and Perfect Target.
(This way you can be 100% that you have a solid reason for taking the trade)
Fundamental Point of View
In its August meeting, the BOE made a decision to keep rates on hold and that disappointed the markets which had priced in a possible increase based on more hawkish members in the votes of the committee from the June meeting.
For this week’s meeting, the Monetary Policy Committee will be returning to its full nine-member board as the new Deputy Governor, Sir Dave Ramsden, attends his first meeting. Platinum Analysts believe the rate is going to be kept unchanged again especially after the replacement of Kristin Forbes by the more dovish Silvana Tenreyro, if the new member Ramsden also joins the doves, it will be rather difficult to forecast a rate hike in the next 2 years. This could act negatively for Sterling’s medium-term outlook. Brexit negotiations will likely play a big part influencing the currency’s path for the rest of this year and over the next.
Logical Point of View
The market is pricing in a possible hawkish approach from the Central Bank. What would be the implications of the 3 possible scenarios in the GBP/USD?
- If they keep the interest rate the same, we could see the normal knee jerk reaction in price and the market comes back to where it started and no much change happens. The medium term bullish momentum stays in place.
- If they cut the interest rate the to 25 BP, hell will come to earth and Cable will sink at least 300 points
- If they hike the interest rate to 25 BP, (very unlikely) GBP/USD will have no other direction but up and $1.35 could be reached within a few hours and the pair would enter in a long-term Bullish mode.
The extent to which the fx market is priced for a possible QE response from BOE is harder to calibrate but we doubt this would come as a total surprise given the terms upon which the Bank of England has spoken about the need to respond to the current period of heightened uncertainty. Nonetheless, a rate cut accompanied by a QE response would be initially negative for the currency as GBP re-joins the ranks of the funding currencies (JPY and EUR) but without having the luxury of a current account surplus. However, we are aware of the recent trend where central banks have delivered further QE but their currencies have subsequently rallied.
Technical Point of View
We also see an opportunity to Short this pair @ $1.3500 and this is a level institutions are definitely watching and a flow of selling orders is to be expected in this area as this huge round number should pour a bucket of cold water in the Bulls’ plans.
How to Trade the GBP/USD
A) Long the GBP/USD @ 1.3145 or the nearest zone with 40 pips stop loss and a target of 1.3480
B) Short the GBP/USD @ 1.3500 or the nearest zone with 40 pips stop loss and a target of 1.3150
C) Look for 3rd Zones on the System and go for 20/20 reversal trades on the day of the decision
D) Place alerts on the major and minor support areas and match them with the zones and go for 20/20 trades
Whatever happens and whatever the outcome, DO NOT revenge trade.
How to become a profitable Trader.
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Hopefully, you have enjoyed today’s article as much as I have enjoyed writing it and have gained great knowledge about trading and how to trade.
See you soon!
The Platinum Formula:
Perfect Fundamentals + Perfect Technical Analysis + Perfect Logic + Perfect Risk Management = Perfect Trade
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