Cable Soars as BOE Votes 9-0 On No More QE

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Market Drivers for July 17, 2013
BOE votes 9-0 on no QE
UK jobless claims fall dramatically
Nikkei 0.11% Europe 0.07%
Oil $105/bbl
Gold $1286/oz.

Europe and Asia:
AUD Westpac Leading Index 0.2% vs. 0.6%
JPY BOJ Minutes
CHF ZEW Survey
GBP BOE Minutes 9-0 vote
GBP Claimant Count Rate -21K vs. -8K eyed
GBP ILO Unemployment Rate 7.8%

North America:
USD Housing Starts 8:30
USD Building Permits 8:30
USD Bernanke Delivers Semi-Annual Policy Report to House 10:00
CAD BOC Rate Decision 10:00
USD US Fed Beige Book 14:00

The release of the BOE minutes revealed that the MPC voted 9-0 to keep rates unchanged and keep QE at the current rate of 375B pounds, surprising the market with its unanimous opinion. Currency traders had expected to see more dovishness from the BOE minutes, but the shift away from stimulus created an instant short squeeze in the pound sending the currency pair through the 1.5200 level in morning London trade.

Overall the BOE noted that any forward guidance will be made in August 7th inflation report, and even though some members still saw a need for further stimulus, others were becoming concerned about the possible complications of exiting the QE program. Most members expected economic growth to pick up in H2 of 2013 but stressed that the key to economic stability was not too exit the QE program too soon.

Mr, Carney’s first MPC meeting has surprised the market by initially signalling a relatively dovish stance by stressing that rates will remain low for a considerable period of time and now showing a more hawkish posture by suggesting that further QE is unlikely. It appears that Mr. Carney is seeking to carve out a broad consensus at the BOE that maintains monetary policy generally accommodative for the foreseeable, but does not add any further stimulus via QE.

In addition to the surprisingly hawkish tone of the BOE minutes cable was helped by better than expected labor market data as jobless claims declined by 21.2K versus consensus forecasts of -8K. This was the biggest fall in more than 3 years and has lowered the claimant count rate to 4.4% – its best showing since February of 2009.

The strong improvement in labor demand is a good sign for the UK economy overall and a clear indication of pick up demand. It may also be the reason for MPC’s less dovish stance as UK monetary authorities are now beginning to see better economic performance.

Today’s news should provide better support for cable which has been particularly weak against the euro on the assumption that Mr, Carney would maintain a very loose monetary policy. Now that impression has been corrected EUR/GBP should correct as well with the pair drifting back towards the 8600 level as the week progresses.

In North American trade all eyes will be on Ben Bernanke’s final Humphrey-Hawkins testimony, as markets try to ascertain Fed’s policy stance on QE tapering and monetary policy in general. Given Dr, Bernanke’s most recent remarks he is likely to maintain a relatively dovish stance ensuring that the monetary policy remains supportive of the economic recovery. If his rhetoric remains accommodative the dollar is likely to see further weakness as the day proceeds with euro eyeing the 1.3200 level while cable could push towards 1.5250. If on the other hand Dr. Bernanke provides some specific details of an an exit the dollar could soar and reverse most of its recent losses.

Boris Schlossberg
Managing Director

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