Fundamental Forex Strategies: Trade the British Pound with the Bank of

England Rate Decision

Whereas in the US the Central Bank is the Federal Reserve, in the UK the prevailing
Central Bank is called the Bank of England (BOE). Since 1997, when the BOE gained
complete independence from the government, the BOE has had full control over UK
monetary policy.
For two days each month the BOEs Monetary Policy Committee (MPC) meets in an
effort to keep inflation at a target level of 2%. The meetings are held to set the
overnight interest rate, and the future course of this rate.
The Monetary Policy Committee is made up of the following members:
The Governor
The Deputy Governor
Bank's Chief Economist
Executive Director of the Markets
4 external members appointed by the Chancellor of Exchequer

Regardless of whether the Bank of England decides to raise, lower, or maintain the
interest rate; the decision always has an effect on the British Pound. Heres why:
1.) When the rate is increased the Bank of England is literally selling government
securities to large financial firms. In turn, the financial organizations are
paying in Pounds for these securities. This effectively decreased the amount
of currency circulating in the economy. A decreasing supply leads to higher
demand, and therefore causes the value of the Sterling to appreciate.
2.) When the interest rates are decreased, the BOE floods the market with British
Pounds. This is down by the BOE purchasing government securities from
financial organizations. In return for the securities, these banks and financial
deals are paid in Pounds, therefore increasing the supply of pounds in the
economy. As supply increases, the value of the Sterling depreciates.
How to Trade the Sterling on the BOE Rate Decision
1.) Prior to the Rate Decision:
a. Many traders buy the rumors and square their positions shortly after the
decision is made. For instance, if the market believes that the BOE will
hike the rate; traders buy the Pound and close the position shortly after
the announcement. On the other hand, if the expectation is a rate

decrease, traders will short the Pound and square the position after the
announcement.
2.) After the Rate Decision:
a. If the markets expectations differ from the actual rate decision there can
be some excellent trading opportunities.
i. If the market is expecting a rate hike, but the Bank of England ends
up cutting the interest rate, a short 1-2 hour trade selling the Pound
may prove successful.
ii. If the market expects a rate cut, but the BOE comes in with an
increase in the rate, a trader may want to place a short long
position on the Pound for 1-2 hours.
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