BOE Chief Rebuffs Hawkish Expectations

Despite hawkish expectations having increased recently, linked to persistent strength in inflation, GBP bulls were disappointed yesterday as BOE governor Mark Carney poured cold water on the idea of a hike. Speaking during the rescheduled Mansion House speech, the BOE governor said that now is not the time to be tightening monetary policy in the UK. Referring to the health of the economy, Carney said that domestic inflationary pressures remain subdued with consumer spending mixed and wage growth anemic. Carney said that he wants to see the economy’s reaction to Brexit and to see whether wages strengthen.

At the recent BOE meeting, three members of the MPC dissented and voted in favour of a hike, seeing GBP firmly bid across the board. However, news this week that the person replacing Kristin Forbes, one of the dissenting voters, is a known dove, fueled a reversal in GBP.

Technical Perspective

GBP/USD remains in a bull flag pattern within the medium term bullish channel, running since the 2016 lows. While the rising channel support remains intact, the focus remains on the further upside. A break of the channel support would open the way for a test of deeper structural support at the 1.2416 level.

EUR/GBP remains toward the upper end of the broad .83 – .8850s range that has framed price action since November last year. Though rejected at its recent test of the level, price looks set to challenge the .8850s high again soon, opening the way for a run up to test the 2016 high a few figures above. Only a break back below the recent .8650s swing low would alleviate the near-term bullish bias for the pair.

RBA Meeting Minutes Recap

Overnight we had the release of the RBA meeting minutes from the recent June meeting. The minutes come in the wake of the May employment report which saw a strong uptick in labour market conditions, vindicating the bank’s comment that firmness in forward indicators suggests a “gradual erosion of the spare capacity in the labour market”.

Key Points

• Economic data over June was largely in line with the cautiously optimistic view that the RBA expressed at the June meeting
• Growth is forecast to continue to rise above 3% over the next few years as wages and prices rise
• Although the minutes were released ahead of the May jobs report, the comments included suggest that the RBA would not have been surprised by the data
• Global economic conditions were deemed to be improving despite headline inflation remaining subdued
• The RBA pre-empted the weak Q1 GDP figure, which was released the day after the meeting though noted that it would not read too much into them as they reflected quarter-to-quarter variations in growth.
• The RBA did acknowledge difficult conditions for retailers, citing concern for low household income growth and debt levels, though also said that trading conditions “appeared to have improved a little since the start of the year”.
• As the meeting was the first post-budget Commonwealth board meeting, the minutes confirmed that the was “little effect on the bank’s near-term outlook”, due to minor fiscal changes.
• Referring to the recent Standard & Poor’s downgrade, the RBA said that it would lead to “some effects” but that “these institutions accessed less wholesale funding than the major banks”.

Market Reaction

The minutes revealed little new information, and as the meeting came before the May jobs report, they haven’t attracted as much attention. AUD/USD remains firm following the meeting minutes. Having moved higher over the last two months, the focus remains on a test of the bearish trend line from the May 2016 highs.