While most of the economists are quite focused on the diverging monetary policies between the US Federal Reserve and the EU’s ECB, paying attention to the Bank of England’s monetary policies might offer an alternative solution within the larger perspective.
Yesterday’s FOMC meeting minutes revealed that the Fed members were not entirely confident of a rate hike and that doubts still linger in regards to the US economic recovery.
The main talking points from the Fed’s minutes were:
- Most of the Fed members were inclined to keeping the fed funds rate at its lower current levels for a longer period of time as they believed that a premature hike in interest rates would dampen the economic recovery and also affect the labor markets.
- The Fed members were however optimistic that economic growth and job gains would help lift inflation and that a June rate hike was ‘possible’ even if inflation is stuck to the lower bounds.
As the minutes revealed the dovish message, the markets saw a selloff in the US Dollar questioning the possibility of a rate hike in June. This is something which we had mentioned earlier on in our commentary.
On the other hand, the UK’s economy albeit facing a slowdown has managed to face the slump in inflation on a better footing. With the Eurozone’s ECB now embarked on a full scale QE and with the region already starting to see an optimistic view on business confidence, the UK’s largest trading partner might have indirectly just given them a boost in terms of economic activity.
While there are signs of a pickup in the UK’s economic activity the current consensus is still mixed as the markets await the revised quarterly GDP numbers.
The most recent BoE’s inflation report did cite that there were downside pressures on inflation but that these were only temporary. Combined this with the political risk of the May general elections and we continue to maintain that the BoE will turn hawkish anytime in the second half of the year.
Although inflation has played spoilsport as two of the BoE’s hawks turn dovish, recent comments from one of the BoE’s members reinforced the view that with a better than expected growth in the average wages, inflationary pressures should kick in and offset any downside pressures due on falling crude oil prices. The BoE members were however cautious, noting that while further monetary easing could be used, the UK interest rates are most likely to turn higher in the coming periods.
In this view, in terms of pure speculation, the UK is better poised for an earlier rate hike as compared to the US.
Should you buy the GBPUSD?
While it’s difficult to say this with conviction, the recent short term rally in the GBPUSD has already retraced some of its losses since last year after falling to lows of 1.495. Within the longer term, we expect GBPUSD to possibly dip down to 1.532 – 1.523 levels which should allow for a good area to buy the Cable, while targeting the medium term price zones of 1.59 on break of 1.55.
