Pound Falls Ahead of BoE Minutes, Balanced Statement Fails To Thwart Momentum

[B]Talking Points
• Japanese Yen: Back Above 110
• Euro: Construction Contracts Further
• British Pound: BoE Votes 7-1-1 To leave Rates Unchanged
• US Dollar: MBA Mortgage Applications On Tap[/B]

Pound Falls Ahead of BoE Minutes, Balanced Statement Fails To Thwart Momentum

The Pound would fall over 50 bps before the release of the BoE minutes as traders anticipated a dovish statement. The central bank voted 7-1-1 to leave their benchmark rate unchanged at 5.00% at their July 10 meeting. It was the second consecutive month that the tally fell that way as Tim Besley pushed for a rate hike and David Blanchflower voted again for easing.

Governor King and the majority chose to leave rates unchanged as they feared a rate increase would spark a crisis of confidence among consumers and businesses, accelerating the economy’s contraction. Although the MPC sees inflation continuing to rise, the second round effects have yet to materialize as wages have remained subdued. The committee in its quarterly inflation report stated that they viewed that inflation would return below their 2% target rate as growth slowed within the next two years. Yet, policy makers refrained from easing rates in order to soften the economy’s landing, as they feared it would cause wage and price setters to conclude that they had abandon their focus on inflation. The pound has continued to trade heavy following the release as a possible rate hike has been eliminated and although a rate hike be not be forthcoming in the near term, the next action from the central bank should be a rate cut.

The Euro started trading lower after running into resistance at the 1.4800 price level. The Euro-Zone June construction report showed a contraction in the sector of 0.6%, which would sink the EURUSD over 75 points. It was the third time in the past four months the activity fell, led by decline in Germany and Spain. The boost the market received from mild weather in the first quarter has dissipated and the slowing growth in the region has begun to take its toll.

The U.S. calendar only has the second tier MBA Mortgage Application indicator on tap. Interest from borrowers has fallen three of the past four weeks, as tight lending standards have discouraged potential buyers and has continued to weigh on the housing market. Another decline would only reinforce the prevailing dour outlook for the sector that was generated by the potential bailout of the GSE’s by the U.S. governemt. Despite those concerns the dollar has held most of its recent gains which could be a sign that further strength lay ahead.

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