The most anticipated event today was the minutes from this month's Bank of England meeting and boy did they deliver. Taking a look at the prerelease levels in the GBP/USD, the currency pair appears to be trading not far from those levels. However, a quick look at intraday charts (shown below) will reveal roller coaster like volatility. Initially the British pound dropped 60 pips against the U.S. dollar on the heels of the release but it recovered almost as quickly yet the gains failed to maintained. Although there was also a tremendous amount of volatility in EUR/GBP, the euro managed to hold onto its gains which suggests that ultimately traders interpreted the BoE minutes as bearish for the currency.
BoE Split 3 Ways
If you recall, at the monetary policy meeting earlier this month, the Bank of England increased their Quantitative Easing program by GBP25 billion. At the time, the market was divided on how much stimulus the Monetary Policy Commitee would deliver - some called for 25B but most called for 50B. Based upon the voting record at the meeting, we learned that one member (Dale) voted to leave the program unchanged while another (Miles) voted for a larger GBP40B increase. The remaining 7 members approved the GBP25B extension and no one voted in favor of a GBP50B move.
Tinge of Hawkishness from Monetary Policy Members
The tone of the Bank of England minutes also contained a tinge of hawkishness. According to the report,"A number of Committee members noted that one consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn, if the projected impact was realised." This can be interpreted two ways - the first being that the BoE is afraid that by stimulating too much, they would be forced to implement an exit strategy prematurely or second, that the 25B QE extension made earlier this month has already forced them to start working on an exit. Either way, additional stimulus from the BoE is becoming increasingly unlikely.
Also, one of the primary reasons why Dale, who is also the Chief Economist of the BoE voted to leave the program unchanged was because of his fears about inflationary pressures and he felt this way before the latest CPI numbers were released (and they were very strong). However at the same time, some members believed that there could be more downside risks to activity in the near term than suggested by the Inflation Report.
On the face of it, the voting record should be positive for sterling. However we are seeing a very reluctant rally in the currency pair because ultimately of all the G7 countries, the U.K.'s central bank is still the most dovish.
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