22 July 2014

Trading GBPUSD ahead of BoE minutes?

GBPUSD moved to new highs after Bank of England governor Mark Carney warned a rate hike was likely sooner of later. Latest minutes from the central bank will reveal how its rate-setting committee plans to vote.
​​​​​​In a speech delivered in New York on Thursday June 12th, Bank of England (BoE) Governor Mark Carney warned that interest rates in the UK could rise sooner than many had previously been expecting. This fuelled the first genuine speculation that a rate hike could occur sooner rather than later, with many in the market previously not expecting one to occur until at least after the general election in May 2015. The reaction of Sterling at the time was significant; GBP/USD rose from 1.6795 to 1.6952 on the day. Ultimately, the move led to Cable trading over 1.7100 on Monday June 16th. This sensitivity shows just how much emphasis the market places on the impact of an interest rate hike in the UK, despite Carney also mentioning that Britain’s economy would need to be balanced by other measures. Carney has been sure to mention that an interest rate hike was not the “be all and end all” of policy action that could be taken by the central bank.

What this means for traders

So it may well be clear that market emphasis regarding interest rates and, to a certain extent the necessity for central bank action, has seemed particularly over-hyped in recent years. In any case, the question still remains as to when this rise may occur in the UK. CPI across the nation stands at 1.9% after rising from the 1.5% figure the previous month. Usually, CPI has a tendency to fall during the summer months due to the impact of sales, but this rise indicates further potential for a rate hike by 0.15 or 0.25 basis points. Ultimately, markets are still banking on a rate rise in early 2015 but it would now be rash to rule one out before the end of the year with GBP/USD printing highs of 1.7164 at the start of this month and currently trading at 1.7056. That drop down below the 1.7100 figure is largely due to recent risk-off sentiment after events in both Ukraine and the Middle East last week and Cable may well regain this ground soon enough. Importantly for Sterling, the minutes from the central bank meeting last month are due out today whilst a vote regarding a future rate hike will also take place. It is this vote, perhaps not today, but in the future, that we may see the real sign of an emergence within the BoE of certain members calling for a rate hike sooner than others. It will be important for Sterling traders to keep an eye on how these nine member votes over the next six months.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.