The Bank of England is expected to keep its benchmark interest rate unchanged at its upcoming policy meeting, amidst concerns of rising inflation. Record oil and food prices have seen inflation remain above the central bank’s 2% target at 2.5%. Oil’s recent ascent above $122 a barrel has raised the threat that inflation will breach the MPC’s 3% threshold. However, the downside risks to the economy continue to mount as the credit crunch weighs down housing prices and consumer confidence, which fell to 70 in April from 77 the month prior. The troubles have started to spread throughout the economy as the service sector declined to a five year low of 50.4 just above contraction, and industrial production fell 0.5% on declining durable goods. The dour fundamental data will make the upcoming rate decision a close vote with perennial dove David Blanchflower’s recent call for action to avoid a recession. The voting committee member voted for a half point cut last meeting and will look to influence other voters. The recent inline print of GDP and better than expected manufacturing reading, shows that the economy is still experiencing growth, which may be enough for committee members to refrain from another cut. Any momentum generate by the decision will be influenced by the U.S. jobless claims and wholesales inventories releases later in the day. Another upside surprise in either will generate bullish dollar sentiment, as they would support recent NFP and ISM improvements.

Speculation has been growing that the BoE may cut rates in light of the recent fundamental data. If the central bank does keep rates unchanged, traders are pricing in a certain rate cut at the June meeting. However, inflation remains a real concern for the MPC and they may look to follow the ECB, which has been garnering support for their hawkish stance from European leaders. With an unchanged rate and hawkish commentary we will look for a five-minute green candle to confirm entry on two lots of GBPUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to major, nearby resistance) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.

Alternatively, a 25 point cut would confirm that the downturn in housing, tight credit markets and slowdown in the U.S. will have a long lasting impact on the economy. We will follow the same strategy for a short as the long above, just in reverse.

Antonio Sousa is a Currency Analyst for FXCM.