Pound Hits 2.0500 But BoE Not Universally Hawkish

[U][B]Talking Points[/B][/U]

  • Japanese yen: firms on US sub-prime woes
  • Euro: Trade Balance slightly weaker
  • Pound: BoE minutes in line, employment better
  • Dollar: CPI Bernanke on tap

[B][U]Pound Hits 2.0500 But BoE Not Universally Hawkish[/U][/B]

Cable broke through the critical 2.0500 figure but found some difficulty holding that level in the wake of relatively tepid BOE minutes. The BOE minutes revealed a 6-3 vote in favor of hiking, with members expressing "differing views about the likelihood of the Bank Rate needing to be increased further at some juncture."
While a solid majority, the 6-3 vote hardly represents an overwhelmingly hawkish consensus and suggests that the MPC members will be more cautious than the market originally expected in implementing additional monetary tightening in the near future. We continue to believe that UK rates will reach 6% by year?s end, but that level may in fact represent the apex of the current tightening cycle. With cable having appreciated considerably over the past several weeks, the pair may now come in for some profit taking as most of the positive news appears to be priced into the unit.
On the economic front the news remained positive, as UK unemployment claimant count rolls shrank more than anticipated to -13.8K vs. -7.5K consensus. UK job creation continues to exceed most analysts forecasts, demonstrating the underlying strength of the present UK expansion.
However, wage gains were more muted than expected at 3.5% vs. 3.6% dropping from the 4% level in April. As the pace of wage growth begins to moderate its provides a strong argument for the BOE to maintain rates steady for the times being. For the rest of the year, the BOE is likely to focus on housing and consumer demand in formulating monetary policy. Should both of those economic measures show a further decline in inflationary pressures, the UK central may well stand down for next several months.
[U][B]FX Upcoming