The Cable has already declined by over 100 pips today from the daily high (1.6130) to trade at 1.6011 at the time of writing. This downside acceleration transpired after the Bank of England (BoE) Minutes release painted a far bleaker picture on the UK economic outlook than previously expected. Although two members of the Monetary Policy Committee (MPC) voted for a rate increase for the third successive month, the language of the Minutes release were clearly dovish. Of note were comments that there have been signs of a slight loss of momentum in the UK economy, weak price pressures remain and the majority of the MPC are feeling that premature monetary tightening measures – such as raising interest rates – would leave the UK economy vulnerable to shocks.
What is far more important to take away from the BoE Minutes though, is that the interest rate decision occurred far before fears of global economic recovery re-emerged after the financial market sell-off last week. The disappointing Manufacturing PMI, which reflected reduced demand from Europe was impacting sector growth, likely influenced the MPC’s tone, but UK CPI at 1.2% unexpectedly drifting a substantial distance away from the BoE’s target of 2%, and average wage growth still not improving greatly would have led to an even stronger opinion on weak price pressures. Take into account the re-emergence of fears over the global economic recovery and the EU economic sentiment bleakness (50% of the UK’s exports) and the stance from the BoE is probably even more dovish today than when the Minutes were recorded.
Assuming the stance of the MPC is probably even more dovish now than the last meeting’s minutes reflect, suggests GBP bulls are far away from what they want to hear – that a third member of the MPC has joined the dissenter’s table. Overall, this all points to the Cable continuing to trade in a bearish direction but the pair has been on quite a rollercoaster for the past few weeks. In order to be assured the Cable will continue drifting towards the 1.58 yearly low, investors need confirmation that the US Federal Reserve will conclude QE next week.
This means that the afternoon’s US inflation data needs to dispel recent anxieties from the FOMC that a higher valued Dollar would be detrimental to inflation targets. If there is an unexpected drop in inflation, serious concern is going to emerge that the Federal Reserve will continue with a further round of QE, meaning talks about when the Fed may raise rates will also be delayed. If this becomes a reality today, there is a likelihood that Dollar profit taking may be widespread and the GBPUSD could recover its losses once again. The rollercoaster journey for the GBPUSD is far from over until we receive clarity on the Federal Reserve’s next move.
Published On Wed, Oct 22 2014, 10:51 GMT