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Bank of England Disappoints The Hawks

By Hantec Markets (Richard Perry)Market OverviewAug 13, 2014 11:43
Bank of England Disappoints The Hawks
By Hantec Markets (Richard Perry)   |  Aug 13, 2014 11:43
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All eyes have been on GBP/USD today with the unemployment and then the Bank of England’s Quarterly Inflation Report to digest. This has resulted in a volatile morning for Cable as traders try to work out when the Bank of England’s first rate rise will come.

Unemployment data continues to improve, but the data also included wage growth which has fallen to 0.6%. Wage growth is seen as crucial to any rate hike by the Bank of England and the fact that inflation remains at 1.9% and wages are significantly below that is not conducive to an imminent rate hike.

GBPUSD 5 min chart
GBPUSD 5 min chart

The Bank of England’s Quarterly Inflation Report also contained a continuation of the cautious stance. Despite increasing the 2014 GDP growth target to 3.5% the BoE sees inflation as remaining at or just below the 2.0% target rate. Also that despite the level of slack in the economy (again a crucial measure) being estimated at around 1% (down from 1% to 1.5%) there is still a tremendous uncertainty around this figure.

With Carney adding that there is no threshold for when wages growth would trigger a rate hike, the MPC retains a large amount of wriggle room. This all adds up to no imminent hike in interest rates.

GBP/USD is now trading sharply lower, down around 80 pips and looks set to challenge the key support around $1.6700. The reason is that the market is having to reassess the time gap between the tightening cycles of the Bank of England and that of the Federal Reserve. The Fed remains around mid-2015, but the Bank of England is now increasingly being pushed into 2015 (from December 2014). The gap is narrowing.

If you look at the Short Sterling Interest Rate futures then the market continues to push back its expectations on the rate hike. According the the market rates, the chances of a rate hike in December are receding now. December is the first MPC meeting after the November Quarterly Inflation Report but the caution in the tone of today’s report suggest that the chances of a significant change in conditions are quite low.

My expectation is that the rate hike will come at March 2015 at the earliest. March is the first MPC meeting after the February Quarterly Inflation Report. That is not taking into account the fact that the Bank of England would also then be seen as the first major central bank to tighten rates and the eyes of the world will be on the UK economic recovery.

DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.

All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

Bank of England Disappoints The Hawks

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Bank of England Disappoints The Hawks

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