Sterling has rallied strongly this morning. The trigger has been the Bank of England meeting minutes. Having been trading around the multi-month lows at $1.5590 in the run up to the announcement, it would appear as though the market had gone too far ahead of itself in its dovish expectations.
Although the consensus suggested no change in the voting structure on the Bank of England’s Monetary Policy Committee from 7 in favour of keeping rates on hold and 2 in favour of a 25 basis point rate hike. However, in light of the dovish Bank of England Quarterly Inflation Report last week, there was certainly a risk towards a dovish shift in the MPC minutes. The feeling was that if there were to be a surprise it would be that one of the two hawks on the MPC (Ian McCafferty was most likely) may change stance and move back to the doves.
However, this move was not seen, with the MPC remaining as they were at 7-2. However, furthermore, to compound the near term miss-pricing of sterling, the committee had even discussed the prospect of a tightening labour market which could be ready to drive real wage growth. Also, the majority on the MPC were concerned that inflation could overshoot the 2% target. I find this last point remarkable, considering that in the Quarterly Inflation Report (which was released more recently than the latest MPC meeting) it suggested that there was a risk that inflation could dip to below 1% in the next six months! This is all rather contradictory.
Regardless though, sterling has jumped strongly this morning with the MPC not as dovish as the market had thought. However, I do not see this jump as a sustainable move. I expect that it is just a knee jerk near term reaction that should be seen as a chance to sell. Once the rebound settles down (and in the past hour there are signs of this settling happening already around $1.5700), I expect the sellers to regain their poise.
Furthermore this evening we have the release of the FOMC minutes at 19:00GMT. Perhaps I can be forgiven for thinking that surely the minutes from the Federal Reserve will be at least as “hawkish” (or should that be “less dovish”) as the Bank of England, and perhaps even more so. This could and should mean that today’s FOMC minutes could easily be a driver of renewed dollar strength. If this is the case then it would induce renewed selling pressure on Cable.
Cable has been incredibly weak in recent sessions and perhaps today’s MPC minutes has given the sterling bulls a brief respite from the selling pressure. However, I would view it as just that, a brief respite before the sellers resume control. There is a near term reaction high at $1.5736 which is the immediate resistance, however $1.5788 is more important near term.