The British pound first broke the psychologically important 2.05 level against the US dollar in the middle of the Asian trading session. Keying off of the stronger UK inflation data reported yesterday and the weaker US PPI numbers, Asian traders aggressively bought the GBP/USD, taking the pair up from 2.0490 to 2.0549 in a little more than an hour. However once European traders came into the market, they began to take profits and initiate short positions.
The correction was exacerbated when the less hawkish Bank of England minutes were released; the GBP/USD eventually sold off to 2.0460. Once Bernanke began to talk however, dollar selling resumed and the GBP/USD took off once again, ending the US trading session not far from the new 26 year high set overnight. The reason why examining the price action is so important is because it tells us that today?s strength in the GBP/USD is driven almost exclusively by dollar weakness and not pound strength. If anything, the Bank of England minutes signals that even if we do have another rate hike this year, it will not be until the latter part of the fourth quarter, at the earliest. Yesterday we indicated that anything short of a 7-2 vote in favor of raising rates would be construed as dovish. The rate hike earlier this month was supported by only 6 out of the 9 members. The dissenting views amongst the monetary policy committee members indicate that as a whole, they are not in as much of a rush to raise rates as the market may have initially thought. This stance is supported by further slowing in average wage growth in the month of May. Even though the number of people claiming unemployment benefits decreased, weaker wage growth could still hurt retail sales.