A more dovish BOE plays into the hands of market expectations
It's easy to get caught up in the moment so I've spent a long time thinking hard about whether I've seen anything that would materially change my thoughts on rate hikes and my trades
They've certainly been more dovish than I imagined they would be but the question is do they really believe it themselves or are they pandering to the market to get what they want?
Being dovish doesn't change the current fundamentals, which I briefly highlighted before the main announcement. The UK is neither better nor worse than it was over 3 hours ago, so on that front I need not change my trade outlook
What being dovish does get them is a lower pound and more ammo by way of factors that support inflation (thus the comment about still waiting for the stronger pound levels to dissipate). Add in the possibility of a Fed hike in Dec, meaning further pound weakness against the dollar, and then the dovishness countering the effects of a stronger pound vs the euro, in the face of further ECB action. They might well be playing the currency markets right now by aiding moves and front running other CB action
The big swinger is perhaps on inflation. While the BOE is always looking for inflation to return to target they've played the transitory card often, making the current low inflation less of an issue. Now they've raised their levels of caution and wanting to see it closer to target and that's potentially a big shift in sentiment. If they are waiting for inflation to come back before hiking we might all be older, greyer or balder by the time that happens
They're still playing two sides of the fence, domestic vs international, and that gives them the ability to lean one way or another to suit themselves at every MPC meeting. See good news in the economy and inflation they can balance that out with global risks. See weak global factors and they big up domestic strength. It keeps them middle of the road
On balance I think that they've danced to the market's tune for hikes further out in 2016/2017, while nothing has really changed fundamentally. For my pound longs that means there's potentially a wider timeframe for when we see rate hikes and means a lot of water can pass under the bridge
How do we trade this change?
If the landscape to a trading strategy looks like changing you have to look to adjust with it. That can be hard as you don't want to change your mind too quickly in the heat of the moment. The one way you can remove all the noise for a while is to focus on the charts and the levels and let that be your guide. If this really is a dovish shift by the BOE then my 1.50 break level GBPUSD will come into play on my sub - 1.50 longs. The 0.7500 will come into focus for my EURGBP shorts.
I don't know what today means for the pound in the days ahead so I can choose to ignore everything that happens today and challenge the market to break my strategy by breaking the levels. If it doesn't then I've no need to do anything. If it does then I'm out with a lower, but still decent profit, and I move on to the next trade
For those that trade shorter term, I stand by my call that the dovishness will see the pound turn tail again in intraday trading. Like I saw the pound getting a bid bias after the FOMC, I now see it taking on a offered bias and becoming a rally seller. For shorts there's still the risk that the economy does see a renewed jump in growth, as we've seen this week, and if the BOE has played to a market that was already pricing in mid-late 2016 for hikes anyway. For longs, this day spells trouble if we see the lower levels break.
The added risks for both sides is what happens in the run up to the Dec FOMC
Whatever my or your thoughts are, the charts speak for themselves. We're still within recent ranges and the big levels are still in play. Ultimately it will be the action at these levels that will make our trading decisions for us, not whether Carney & Co have changed their views
