UK BOE Inflation Report

This morning at 10:30am GMT (5:30am EST) the Bank of England came out with its inflation report. This is not a number but rather some prepared text along with BOE's Chief Merv King gives a speech. Yesterday I did hear a rumor that this Inflation report was going to be dovish, however I could not confirm this rumor on any official news wire, it was rather something a very knowledgeable and connected trader told me. There was also some comments from the IMF in regards to the new Conservative-Liberal Democrat's approach to fighting the deficit in the UK. Regardless the GBPUSD fell some 220 pips during Tuesday's New York session. The USD gained accross the board, however this was particularily seen in cable. The further USD gains could be attributed to the announcement that China will likely hike interest rates 3 times in the next 12 months, this is USD positive, this added fuel to the fire as the USD has gained this week so far due to the positive Non-Farm Payrolls and the fact that FOMC finally made the amount of QE2 clear, and this had already been priced into the markets. Also a poor US Treasury auction during Tuesday increased the risk aversion which in turn strengthened the USD, the equity indices also fell.

Text and speeches are a different type of news to trade. Generally the forex news trader must assess if the wording is dovish, which will weaken the currency, or hawkish which will strengthen the currency. Sometimes the words central bankers can use can be quite complicated as most of them have doctorate degrees in economics. However ultimately as the trader we have to trust the price we see, so if we can get a general idea of the text and see price confirm this we can usually enter a low risk trade and make pips quickly following the momentum of the post news volatility. Basically they changed from a more cautious tone to a more optimistic one.

Here is what was announced: (* = highlighted)
(UK) BANK OF ENGLAND QUARTERLY INFLATION REPORT: READY TO MOVE IN EITHER DIRECTION AS RISKS EVOLVE (REITERATES)
- 2012 GDP just over 3% v 3.0% Aug forecast

- Inflation:
*- Inflation rate to rise further in near term; risk to inflation forecast are to the upside
*- Near term inflation forecast higher than in Aug
*- Inflation rate to remain above target through 2011
- Without rate hike, CPI to fall below target in early 2012
*- Timing and extend of CPI decline uncertain, roughly equal chance CPI above or below target in 2 years.
- Notes a wider than usual range of views on inflation outlook.

- Policy:
- Forecast assumes key rate rises gradually from H2 2011

- Growth:
*- Risks to growth forecasts skewed to the downside.
- Annual rate of growth 2.5% in mid-2011, above 3% in mid 2012
- Forecast show GDP growth at just over 3% in 2 years, after slower growth in 2011
- Forecast based on market rates at 0.6% in Q3 2011, 0.7% in Q4 2011 and 1.2% in Q4 2012
- Spending review contained little news on economic outlook
*- Growth in recent quarters stronger than expected
*- Sees economic growth moderating in 2011, and picking up in 2012
- Unclear when exports will rise as strongly as expected

The main content of King's speech was then reported:
(UK) BoE gov King: UK recovery is dependend on the world economy; Output level like to remain weak
- Difficult to judge inflation outlook.
- Commodity prices and weak sterling to push up near term CPI.
- Level of output likely to remain weak.
- Has not changed view on economy since Comprehensive Spending Review (CSR).
- Largest risk is from external environment; exports have not picked up as thought they might.
- Decline in sterling may impact trade.
- BoE not pressured by foreign central banks to avoid QE.
- Has confidence in Fed reserve; critism of QE2 move by the Fed is bizarre.
- Not accurate to say MPC disagree on impact of budget cuts; people should not be nervous on range of MPC views; all MPC members believe there will be a modest recovery.
- UK housing market not the top on list of worries, the world economy is; UK housing surprisingly buoyant.
- Sees some signs of weakness in house prices; only 5% of home owners in negative equity.
- Comments from BoE members Posen and Miles should not be viewed as favoring CPI overshoot v undershoot.
- Commodities not showing impact from US QE2.

In the Profitmongers live Futures and Forex News Trading Room, we could not spike trade the initial 50 pip spike seen on the GBPUSD when the news first hit the wires. Automated language processing computers can analyse this news text faster than us humans can read it...I will have to dig out a link which gives a peek at the kinds of things some advanced quants are doing in this field. However it does not take a Ph.D in Computational Linguistics to see that after this initial spike there was a pullback to the 50% retracement. Then the GBPUSD's price started to move up off around the 1.6020 level, putting in a strong 1 minute up bar about 5 minutes after the release. This is where we got a live forex trading signal to buy the GPBUSD. Initially heading back to the former spike highs at 1.6045, it quickly hit the mid-handle level of 1.6050 where we covered half and moved up our stoploss to breakeven. So 30 pips in basically 4 minutes. Prices then went sidewise for at least 15 minutes, reaching as high as 1.6065, during which a confirmation of news yesterday concerning Chinese interest rates came in, which the People's Bank of China (PBOC) announcing a hike of 0.5% in the Reserve Ratio Requirement. Generally higher Chinese Rates equals stronger USD, so we covered the rest here, and it may have even been a signal to short...but the move was short-lived as this was expected anyhow. Regardless the GBPUSD came back down to the former spike high of 1.6045 giving potentially another entry long, this time reaching the 161% fibonacci extension of the intial spike, and after another slight pullback, reaching the 1.6100 handle.....all in all a fabulous afterspike opportunity regardless and an excellent day with the earlier gains on the EURUSD during the London Open.