On Thursday 14 July the Bank of England will make its monthly interest rate decision. Normally a rate increase leads to the Pound gaining value against other currencies, as well as leading interest rates on consumer loans and bonds to rise in turn. A cut will typically have the opposite effect.
However, the post-Brexit situation is rather more complicated. Markets are concerned about instability in the British economy following the decision to leave, and any move by the BoE to stabilise the situation could lead to improved confidence.
The BoE is currently expected by many to cut rates by 25 basis points, from the present 0.5% to 0.25%. To get an idea of the effect an announcement like that can have on markets, one only needs to look at the previous day’s announcement from Canada.
There, a decision to keep the interest rate at 0.5% lead to the Canadian Dollar gaining over 100 pips against the US Dollar (see picture). That move largely happened within the two minutes following the announcement before the market hit support.
Announcements like these have an impact on a wide range of markets and asset classes, most obviously the national stock indices like the FTSE100 in the UK. However the foreign exchange or ‘forex’ markets often provide the best chance for short-term intraday traders to catch the fallout from these events.
Using the Canadian example, a trader taking a short position on the USD/CAD pair with a £10/pip lot size would have stood to profit £1,000 had they succeeded in catching the entire move.
A large lot size like that is obviously risky, which is why using a stop loss is always important. Likewise, some traders will fear a sudden reversal of the move and take their profits well before the whole move has occurred.
However it is possible for traders to catch a move like this without having to anticipate the direction of the result ahead of time. Using orders placed either side of the price in the last few minutes before the announcement, known as bracketing, traders can stand a chance of profiting from the move whichever way it goes. It is of course important to cancel the other order once one is triggered.
Like any strategy, there is no guarantee of success. An order placed too close to the current price risks being stopped out by general volatility, while one too wide might not be triggered and miss the move, depending on the impact the news has. Sometimes the move will reverse midway and stop traders out unexpectedly. Leveraged spread betting is always going to be a risky activity.
That said, the Canadian example shows that these moves do occur, and the Bank of England announcement could well be a much more substantial piece of news.
Every trader has their own style and their own preferred strategy, and this is just one example of how profits can be gained from news like this. The most important thing is that traders shouldn’t risk more money than they can afford to lose.
Fundamental announcements like this happen all the time in trading, but one of this potential size is not to be missed. The post-Brexit environment creates uncertainty about how the market will react to this news either way, and a normally discouraging interest rate cut could be taken as a stabilising move that restores some confidence in the Pound and the British economy. It is a very volatile, very high-risk time to be in the markets, but that is often when the best opportunities emerge.
This article does not constitute investment advice. Please see our full disclaimer.