The Bank of England releases the minutes of the MPC’s July meeting on Wednesday next week. The decision to keep the rate at 0.50% and the stock of asset purchases at GBP 375 bn was probably made unanimously. The most hawkish member of the Committee, Martin Weale, had signaled earlier that he would not support an immediate hike. Bank of England governor Mark Carney has hinted that interest rates might rise sooner than had been expected in his Mansion House speech. However, the minutes will likely dampen rate hike expectations by indicating a number of sources of uncertainty, mainly regarding the weak growth rate of wages and prices. The MPC would not have known that inflation jumped in June to 1.9% yoy. Dovish minutes can be a good opportunity to go long on GBP/USD. In our opinion the first rate hike is most likely in November and next-month meeting will bring us a split vote.
In the January 2013 – July 2014 period the rate differential has explained more than 80% of the variation of the GBP/USD rate. In line with the econometric model the fair value for the GBP/USD is currently at 1.73. Widening of the spread between UK 2-Year and U.S. 2-Year rates (likely scenario) will push this value up. The model says that bullish strategy on GBP/USD is justified.
The buck is bouncing back as North American traders kick off a new trading week, and the proximate cause is the same one that’s been recurring on and off for over half a ...
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