Sterling rebounded from a prior four-month low against the dollar following the Bank of England minutes which revealed two policymakers voting to uphold the interest hike this August.
Several strategists in the market had been anticipating only one member of the Bank’s Monetary Policy Committee at most in order to vote a rate rise. News that two high-ranking members favoured such a move which resulted to the market bringing forward new speculation for a first U.K. interest rate rise in the course of five months.
Following last week’s Quarterly Inflation Report, that was globally perceived to be quite dovish, the market had pushed further back speculations and forecasts for a rate rise to March from this year’s first two quarters.
Despite higher volumes, sterling was able to rise $1.6680, up 0.3 % on the day and kicked the broad dollar uptrend. It was able to hit a four-month depression of $1.6602 earlier in that trade day which was its lowest since early April this year and was seen last trading at $1.6645 up 0.2 % on the day.
The euro was down 0.5 % at 79.69 pence which hit its lowest in a week along with the euro hitting a two-month high of 80.37 pence the week prior after the said Inflation Report gave its figures.
According to several key strategists, the pound was unlikely to rise much, considering that the inflation was well below the BoE’s target of 2 % and wagers were still due to show signs of picking up which is indicative of a considerable limp in the present British economy.
Majority of MPC members found that there wasn’t enough inflation pressures to validate increasing interest rates just yet, since this contention is now firmly supported by the previous week’s CPI data according to analysts at UKForex.
Moreover, the same members similarly just want to see more evidence of wage growth prior to increasing the rates and so in spite of the surprising vote during last week’s data is dampening the positive effects on the British pound.
With consumer prices rising 1.6 % on the year in July, which was well below the forecasts of a 1.8 % reading as showed last week. Month-on-month, the consumer price index diminished a total of 0.3 % respectively.
While economic growth is considered vigorous and upbeat, rate hike expectations have now been pushed back since wages have still yet to rise on real terms. As a result, the sterling trade-weighted index discarded 2 % since it hit a six-year peak against the dollar during the early weeks of the third quarter.
The risks are apparently very real and that more members are opting to join the two hawkish policy makers on the committee in the succeeding months that could give a more robust support to the pound especially as against the euro.
Generally, the minutes should ease the recent weakness experienced by the sterling but many traders are still better off in their preference to keep longer positions through euro/sterling shorts based on the current strategy employed by Citi.