Bank of England Rate Hike Likely

The most important news today (at least in terms of the foreign exchange market) is the release of the minutes of last month’s BoE Monetary Policy Committee meeting.  The release surprised most of the market with a more hawkish-than-expected stance.  The Committee did vote to keep interest rates steady in June, but the vote was much closer than many traders had predicted.  Most market analysts had expected a 7-2 vote against a rate hike last month, but the actual vote was 5-4.

In addition to that, Governor Mervyn King was one of the four dissenters calling for a rate hike.  The bank’s governor has only been overruled twice in the 10-year history of the Monetary Policy Committee.  Many traders today feel that with King now calling for a rate hike, the decision is almost a done deal.  Today’s release of the meeting’s minutes only confirms forex market speculation that began with hawkish comments earlier in the month by Governor King and others.

There are other important currency market considerations regarding interest rates besides the comments of the Committee members.  Money supply growth has reached its fastest annual pace in seven months.  Oil prices are still at $69/bbl.  Other inflation indicators are also robust, including the British housing market and the index of prices in shops.

It is difficult to predict the actual actions of central banks (that doesn’t stop currency strategists from trying).  But the various exchange markets have already felt the impact of the release of the Committee vote.  Futures market traders are betting on a rise in rates to 5.75% at the next meeting.  In the forex market, the future rate hike is being priced into the value of the pound right now.  For example, GBP/USD easily cleared 1.9900 after today’s minutes release, and it is likely not to encounter much resistance at 2.000.  The pound has also risen against the Japanese yen, climbing to its highest level since 1992.  Look for strong support for pound long bids in the coming day as the forex market prices in the likely BoE rate hike.