Rates Unchanged But Hawkish Signals Support GBP
GBP soared to fresh 2017 highs against the US Dollar today as the latest Bank of England meeting marked a further hawkish shift. Although the MPC voted 7 – 2 to keep rates on hold, there were clear indications that the bank is getting ready to raise rates.
The minutes of the meeting, released alongside the monetary policy decision, saw the MPC noting a that the economy was showing a “slightly stronger picture” since the last meeting linked to a strengthening of the housing market, firmer employment as well as an increase in retails and new car sales. The minutes also noted that the MPC feel that “The circumstances since the referendum on EU membership, and the accompanying depreciation of sterling, have been exceptional.”
Market Underpricing BOE Rate Hike
In terms of rates themselves, the minutes noted that the majority of policymakers judged that “some withdrawal of monetary stimulus was likely to be appropriate over the coming months” and that “policy may need to be tightened more than assumed by the yield curve”. Essentially, the BOE was letting the market know that they are underpricing the likelihood of a BOE rate rise at this point.
Rising inflation over the year has seen an uptick in rate hike expectations, but until this meeting, most market players anticipated the first-rate rise happening in H1 next year. Today’s meeting and comments have seen a sharp repricing in rate hike expectations with many now judging a 2017 rate hike as likely, leading to the jump in GBP across the board.
Rate Rise Remains Data Dependant
It is important to note, however, that the bank did highlight its data dependant stance saying that removal off stimulus would be necessary “If the economy follows a path broadly consistent with the August inflation report central projection”. While inflation data has indeed been rising and the unemployment rate has continued to move lower, wage growth remains a sticky issue. The latest wage growth data shows that earnings fell back to 2.1% in the three months to July putting further pressure on the UK consumer.
Is BOE Just Looking To Lift GBP?
There is no doubt that today’s meeting marked a decidedly hawkish shift in the bank’s language but one line of thought is that this is simply verbal intervention with the bank looking to fuel a rise in Sterling with the GBP trade weighted index sitting around 74 ahead of the meeting, near historic lows. The BOE needs GBP to rise in order to cap inflation around 3% as projected and the comments at today’s meeting could be viewed as an attempt to achieve this goal.
GBPUSD is currently challenging the trend line resistance of the rising wedge formation that has framed price action over the last 12 months. Further resistance sits just above at the mid-2016 high around 1.3440s while the broken 1.3270s prior 2017 high- should provide supported if retested.
EURGBP has broken down through the rising trend line running from spring of this year and is fast approaching key support at the January 2017 high around .8835 with the 50% retracement from year to date lows sitting just beneath. This will be a key zone for the pair and is likely to see some buying kick in on the first test.