The unanimous policy vote from Bank of England (BoE) monetary officials gave strength and stability to the British pound and more clearly signaled the intentions of new BoE Governor Mark Carney.
Today’s release of the latest Bank of England (BoE) meeting minutes revealed that the Monetary Policy Committee (MPC) voted 9-0 to keep rates unchanged and maintain quantitative easing (QE) at the current rate of GBP375 billion, surprising the market with the unanimous vote.
Currency traders expected to see more dovishness from the BoE minutes, but the shift away from stimulus created an instant short squeeze in the British pound (GBP) that sent the GBPUSD currency pair through the 1.5200 level in morning London trade.
Overall, the BoE noted that any forward guidance will be made in the August 7 inflation report, and even though some members still saw a need for further stimulus, others were becoming concerned about the possible complications in exiting the QE program. Most members expected economic growth to pick up in the second half of 2013, but they stressed that the key to economic stability was not to exit the QE program too soon.
New BoE Governor Mark Carney's first MPC meeting has surprised the market by showing a more hawkish posture and suggesting that further QE is unlikely. Carney initially signaled a relatively dovish stance, stressing rates will remain low for a considerable period of time.
It appears that Carney is seeking to carve out a broad consensus at the BoE that maintains generally accommodative monetary policy for the foreseeable future, but does not add further stimulus via QE.
In addition to the surprisingly hawkish tone of the BoE minutes, GBPUSD was helped by better-than-expected UK labor market data as jobless claims declined by 21.2K versus consensus forecasts for a decline of 8K. This was the biggest decline in more than three years and has lowered the claimant count rate to 4.4%, the best showing since February 2009.
The strong improvement in the UK labor market is a good sign for the economy overall and a clear indication of a pick-up in demand. It may also be the reason for the MPC's less-dovish stance as UK monetary authorities are now beginning to see better economic performance.
Today's news should provide better support for the pound, which has been particularly weak against the euro (EUR) on the assumption that Governor Carney would maintain a very loose monetary policy. With that impression now corrected, the EURGBP should correct as well, with the pair drifting back towards the .8600 level as the week progresses.
Bernanke Testimony Takes Center Stage
In today’s North American trade, all eyes will be on Fed Chairman Ben Bernanke's final Humphrey-Hawkins testimony. The markets are trying to ascertain the Fed's policy stance on QE tapering and monetary policy in general.
Given Dr. Bernanke's most recent remarks, he is likely to maintain a relatively dovish stance, ensuring that monetary policy remains supportive of the economic recovery. If his rhetoric remains accommodative, the US dollar (USD) is likely to see further weakness as the day unfolds with EURUSD eyeing the 1.3200 level and GBPUSD possibly pushing towards 1.5250.
If, on the other hand, Bernanke provides some specific details about tapering of QE, the dollar could soar and reverse most of its recent losses.
By Boris Schlossberg of BK Asset Management