BoE – Getting Ready to Hike?

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Market Drivers July 22, 2015

MPC Minutes reveal 0-0-9 vote but edges closer to tightening
Stevens neutral rate will be lower than used to be
Nikkei -1.19% Europe -0.06%
Oil $50/bbl
Gold $1093/oz.

hope but
Europe and Asia:
AUD CPI 0.7% vs. 0.8%
GBP MPC Minutes

North America:
USD Existing Homes Sales 10:00

The MPC minutes revealed today that the Bank of England voted to leave rates unchanged at 0-0-9 as expected but members turned decidedly more hawkish clearly preparing the markets for the start of normalization in the foreseeable future.

The minutes noted that, “For a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate. For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced.”

With Greece no longer a risk at next months meeting the voting pattern may begin to turn with some analysts suggesting that the vote could become 3-0-6 as early as August. Certainly the recent rhetoric from MPC members indicates that the Bank of England is now seriously considering a path towards normalization of rates as both labor and wage data continue to show gains. Furthermore MPC members see a sharp pick up in inflation as near term factors begin to fade.

The net takeaway from today’s release was that the central bank is clearly shifting from its neutral stance and barring any additional geopolitical risk is likely to start hiking rates this year, perhaps even ahead of the Fed. Such posture should prove positive for the pound which remained well bid throughout the night and traded up to 1.5645 before retreating in some profit taking.

If the BoE does indeed go through with its intent to hike rates this year, cable should continue to strengthen on a relative basis, especially against the commodity block which is seeing the exact opposite monetary policy put in place as those central banks continue to ease.

Tonight the RBA governor Stevens noted that he expects the neutral interest rate in Australia to be lower than normal for a considerable period of time leaving a hint that central bank may cut further as the year progresses. For now however, Mr. Stevens noted that the RBA is content to stay pat on rates remarking that he is encouraged by better economic news of late.

Still the divergence between RBA and BoE is likely only to widen in the second half of the year leading to further gains in the GBP/AUD cross which picked up 200 points in Asian and early European trade today. Ultimately the pair could push towards the 2.2000 mark if RBA cuts while BoE hikes before the end of the year.

In North America today the market will get a look at the Existing Home Sales data with analysts looking for a tiny pick up of 5.40M units versus 5.35M the period prior. USD/JPY has come off the highs as US yields have compressed a bit and the pair could test support at 123.50 later in the day if the profit taking in fixed income markets continues. But it remains in a tight 124.50-123.00 range as markets await for some definitive action from the Fed.

Boris Schlossberg
Managing Director

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