Market Drivers May 20, 2015

Euro tests 1.1100 support
UK BoE Minutes
Nikkei 0.85% Europe -0.12%
Oil $59/bbl
Gold $1206/oz.

Europe and Asia:
AUD Westpac Sentiment 6.4% vs -3.2%
JPY GDP 0.6% vs. 0.4%

North America:
CAD Wholesale Sales 8:30

USD FOMC Minutes 14:00

Cable popped slightly in the aftermath of the release of BOE minutes, rising above the 1.5500 figure in morning London dealing. The minutes offered little fresh information essentially reaffirming the view that UK monetary policy will remain on hold for the foreseeable future.

However, one sentence leapt out at traders as the minutes noted that, “For two members, the immediate policy decision remained finely balanced between voting to hold or raise Bank Rate. While there was a range of views over the most likely future path for Bank Rate, all members agreed that it was more likely than not that Bank Rate would rise over the three-year forecast period.”

Although this was hardly a resounding statement of hawkishness it does suggest that most MPC members believe that the current low inflation conditions are a temporary result of steep drop in energy prices and that price levels are likely to rise as wage pressure begins to build. Therefore it’s clear that the MPC is leaning towards a tighter stance but may wait perhaps until 2016 before it begins its rate normalization program.

Elsewhere the euro remained under pressure testing the 1.1100 barrier in late Asian session trade but finding some buyers underneath that level to pop back above the figure by mid morning London trading. The selloff in the pair is unsurprising given the unresolved nature of negotiations with Greece and the tepid economic performance in the region. Today sharp decline in construction output to -1.8% from 0.8% the month prior is just the latest data point to miss its mark.

Tomorrow the market will get a good glimpse at the latest conditions on the ground as Flash PMI services will be released.but given the lackluster pace of growth in the region its doubtful that May saw much of an improvement in economic activity.

The euro rally has always been much more about the disappointment in the dollar rather than any genuine demand for the euro. To that end today’s FOMC minutes could continue the seesaw in the pair if they prove to be dovish. Overnight Chicago Fed President Charles Evans suggested that rates should remain on hold until 2016 given the lack of inflation in the US system. If his view is the dominant voice in the minutes the EUR/USD could reverse most of its losses as the currency market will once again sell the dollar.

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