[B]Bank of England Meeting Minutes (JUN) (8:30 GMT; 4:30 EST)
Expected: 7 (No Hike) - 2 (Hike)
Previous: 9 (Hike) - 0 (No Hike)[/B]
[B]How Will The Markets React?[/B]
After a unanimous vote for a 25 basis point hike in May to 5.50 percent and even some discussion of a 50 basis point hike, outlooks on the Bank of England?s next move have been broadly mixed. On one hand, inflation came down to 2.5 percent in May, down quite a bit from the 3.1 percent rate we saw in March that drove the BOE to raise rates in the first place. On the other hand, CPI is still well above the central bank?s target of 2.0 percent and upside risks persist. While the discussion amongst policy makers regarding these issues will be analyzed thoroughly by the markets, the biggest draw by far will be how the individual BOE members voted, as just a few show of hands for a rate hike in June could lead to speculation of policy action in July. BOE policy makers tend to have no problems speaking out against the majority, but when über-dove David Blanchflower votes for a hike as he did back in May, you have to believe that the central bank?s hawkish stance won?t be quick to fade, thus, expectations are for a 7-2 vote. Nevertheless, if we see that the decision to leave rates on hold was unanimous; traders will be betting that July will yield a steady hand as well.
[B]Bonds - 10-Year Long Gilt Futures[/B]
Gilts have recovered some losses after bouncing from the recent lows, but confidence remains shaky as daily candles show long wicks. For a more resilient break higher, price would have to surge up through 104.04/08, but with the minutes from the Bank of England?s June meeting scheduled to be released on Wednesday, it may be a lot to ask at the moment. Potential trendline support lies below at 103.55, but if the minutes reveal a handful of votes for a June hike, it will significantly up the ante for policy action in July and Gilts could resume their descent. On the other hand, a unanimous vote for unchanged rates in June could be the fuel to get a Gilt rally going through resistance.
[B]10-Year Long Gilt Futures (Daily Chart)
FX - GBP/USD[/B]
After plunging down close to the 1.9600 level, GBPUSD has made quite the recovery over the past week as price has reached as high as 1.9893. Is the British pound primed to reach the 2.00 level once again? If traders start pricing in the chance of rate hikes in the near-term by the Bank of England - quite possibly - but first, GBPUSD would have to break the 61.8% fib of 2.0134 - 1.9622 at 1.9938. This could occur as soon as Wednesday upon the release of the BOE?s June policy meeting minutes, as just a few votes for a hike would be enough to lead the markets to believe that they may pursue policy tightening in July. However, if the minutes reveal that the decision to leave rates on hold was unanimous; traders will be betting that July will yield a steady hand as well and GBPUSD may easily sell off to the 1.9800 level.
[B]GBP/USD (Daily Chart)
Equities - FTSE 100 Index[/B]
UK stocks dropped for the second day in a row, sending the benchmark FTSE 100 Index down 0.8 percent to 6,650.20. The decline was led by Tesco Plc, as shares slumped 4.9 percent to 434.5 pence, the biggest decline since April 2003, after the company announced that sales, excluding gasoline revenue, gained at the slowest pace in a year and less than analyst estimates of 5 percent. Softness in UK equities may continue on Wednesday as the minutes from the Bank of England?s June meeting are anticipated to show a 7-2 vote for no action and will stir up concerns amongst traders that the central bank will move to hike in either July or August. Furthermore, losses for the FTSE 100 could hit targets as low as 6,600.00 if the minutes show that even more members voted policy tightening. On the other hand, a surprise unanimous decision to leave the benchmark at 5.50 percent in June would propel the UK equity index up towards the recent highs near 6,750.00, as the vote would essentially signal that rates will not go up in July, and depending on commentary from the meeting, perhaps not even August.
FTSE 100 Index (Daily Chart)