Surprise! BoE Votes 2-7 for Rate Hike

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Market Drivers for August 20 2014

BoE votes 2-7 on rate hikes cable pops to 6670

Euro breaks below 1.3300

Nikkei 0.03% Europe 0.36%

Oil $95/bbl

Gold $1294/oz.

Europe and Asia:

EUR GE PPI -0.1% vs. 0.0%

GBP UK BoE Minutes vote 2-7

North America:

CAD Wholesale Sales 08:30

USD FOMC Minutes 14:00

The release of BoE minutes sent cable soaring in morning London trade today after they revealed a surprisingly hawkish bent with two MPC members voting for a rate hike. The 2-7 vote shocked the currency market with consensus expecting the BoE to remain at 0-9.

Ian McCafferty and Martin Weale were the two members who voted for the hike. The two hawks used the argument that wage rises may be lagging the uptake in labor market and that since monetary policy also operates with a lag, the BoE should anticipate the decline in spare labor capacity and tighten policy now.

Both Mr. McCafferty’s and Mr. Weale’s arguments are likely to fall on deaf ears as the latest UK CPI data which was released just yesterday and well before the BoE meeting is suggesting just the opposite – namely that price pressures are decreasing rather than increasing, making the case the for a rate hike at this time utterly unnecessary.

It will be interesting to see if the two hawks maintain their tightening bias at the next MPC meeting in September or whether they absorb the latest economic readings and change their position back to neutral. For most members of the MPC,”there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate.”

Cable spiked to a high of 1.6675 in the aftermath of the news, but quickly lost most of its gains as markets viewed the vote with skepticism given the weaker UK inflation reading. The pair remains in corrective phase and could tumble further towards the 1.6500 level if UK data shows further deterioration over the next several weeks. For now however the pound may have found support at the 1.6600 figure and is likely to trade above that level for rest of the day.

Elsewhere, the EUR/USD finally cracked the 1.3300 barrier as stops pushed the pair all the way to 1.3285 before short covering kicked in. The euro has been a slow motion car wreck for the past several weeks forming essentially a one way move to the downside ever since it broke the 1.3500 mark.

The widening discrepancy between US economic and EZ economic performance is finally starting to weigh on the pair and tomorrow’s EZ PMI reading would only accelerate the decline if they show further deterioration in the region.

In North America today the calendar is muted until the release of FOMC minutes at 1600 GMT. Markets do not anticipate any change, but any optimistic talk of US rebound may be taken positively by currency traders and could push USD/JPY towards the key 103.50 mark as the pair continues its week long rally.

Boris Schlossberg
Managing Director

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