British Pound Drops On BOE Minutes - Buying Opportunity? Maybe Not.

[DailyFx]

The British Pound tumbled lower for a test of 1.8550 this morning on the release of the minutes from the Bank of England’s most recent policy meeting.



The BOE meeting minutes revealed a 7-1-1 vote to leave rates steady in August at 5.00 percent, with one dissent by Tim Besley in favor of a 25bp hike and one dissent by the ever-dovish David Blanchflower in favor of a 25bp cut. This was the same vote count that we saw in July, which helped to limit the impact of the release on the British pound. Looking at the details of the minutes, the Committee continues to harp upon inflation, and with CPI well above their 2 percent target at 4.4 percent this is not entirely surprising. However, they are clearly concerned about growth as well, and with the Committee saying that their main questions were “the likely degree of persistence in inflation and how much spare capacity would be needed to offset that persistence,” it appears the BOE will seek to leave rates steady, rather than raise rates.

Indeed, with the 5 percent Bank Rate already weighing on economic expansion, they are hoping that the slowdown will be enough to bring price pressures down on its own, and until CPI starts to fall lower, the BOE is unlikely to make monetary policy more accommodative. While overnight index swaps may be pricing in over 75bps worth of rate cuts within the next 12 months, these moves may not occur until 2009. As a result, there are still opportunities for the British pound to gain, but with the latest FXCM SSI numbers showing that traders are buying up GBP/USD (long positions are up 15.5 percent from yesterday), the contrarian indicator suggests the pair could continue lower. Furthermore, upcoming event risk is anticipated to work in favor of GBP/USD bears since UK retail sales for the month of July are forecasted to slump 0.2 percent, dragging the annual rate down to a more than 2-year low of 1.8 percent. As I mentioned in my forex forecast for the top 5 indicators of the week, the data would be in line with the British Retail Consortium’s (BRC) July survey, which indicated that consumers tightened their purse strings and led same-store sales to tumble 0.9 percent from last year. Furthermore, labor market conditions have started to deteriorate as jobless claims have risen during the past six months, suggesting that consumption growth peaked long ago.