Week In FX Europe – Will The BoE Show Dissent?

• Attention Turns to BoE MPC Votes Tuesday
• Will the BoE hawks come out to play?

This week saw the pound slip to a four-week low on Wednesday (£1.6753), after investors were left disappointed following the Bank of England’s (BoE) ‘dovish’ inflation report. A ‘hawkish’ report had been expected and certainly priced in.

UK policy makers have left its growth and inflation forecasts broadly unchanged – a rise of its main benchmark rate (+0.5%) is still expected in H1 of 2015. In the post press conference, Governor Carney played down expectations of an earlier-than-expected rise in interest rates. Tightening UK monetary policy depends on the degree of slack in the economy, and the prospects for its absorption. In retrospect, sterling’s reaction was a clear signal that the market once again got ahead of itself.

Attention now turns to the minutes from the BoE’s May 7-8th MPC meeting. They will be published next week (May 21st), a day after the UK’s April inflation data. Annualized inflation is expected to tick up to +1.7%, from a four-year low of +1.6% in March. The minutes will provide a better indication of the spectrum of views within the MPC as “to spare capacity and the size of the minority supporting earlier tightening.”

The BoE’s MPC membership will change by one-third over the next few months:

In – Haldane, Forbes and Shafik join on June 1st.
Out – Dale Bean and Fisher

The market should expect the high turnover to be a blow to the ‘hawks’ backing a rate hike by year-end. It would be a tad unusual for any new members to “swim against the current” so early in the new career. Expect the new members to follow the leader, Carney, who does not seem in any rush to tighten policy.

Other Major Events Next Week:
Wednesday:

• MPC Asset Purchase Facility votes and official Bank rate votes see above.

Thursday:

• French and German flash manufacturing PMI (leading indicator of economic health). The ECB needs all the help it can get. From a market and credibility perspective, they are playing with fire by using strong words to talk about action in June. The biggest risk to the market is the ECB disappointing at the next rate decision meeting on June 5th as it has done in the past. If so, all the hard work done by the EUR bear over the past ten-day’s would be unwound.

Friday:

• German Ifo business climate. It will be interesting to see if geo-political concerns with Ukraine have any impact within Europe’s strongest economy. This survey is highly respected due to its large sample size and historic correlation with German and wider Eurozone economic conditions.

• European Shares Flat Early – MarketPulse
• Britain to Run out of Resources – MarketPulse
• Russia Growth Stalls At 0.9 Percent in Q1 – MarketPulse
• IMF Warns France Must Stick To Budget Cuts – MarketPulse
• Euro Zone Growth Unchanged at 0.2 Percent – MarketPulse
• Euro Area Bonds On The Front Foot – MarketPulse
• Germany Powers On Boosted by Domestic Demand – MarketPulse
• Germany’s Economy Grows 2.3% Year on Year – MarketPulse
• Carney: U.K. Economy Still Faces Headwinds – MarketPulse
• IMF Predicting Low Inflation in the EuroZone – MarketPulse
• DAX Near Record High As Part of Global Rally – MarketPulse
• ECB Sources Say Bank is Preparing the Policy Bazooka – MarketPulse
• GBP Falters After BoE Inflation Report Keeping Rate Hike to 2015 – MarketPulse
• BoE Cools Down UK Rate Hike Talk – MarketPulse
• BOE Carney Says Economy Heading Back to Normal – MarketPulse
• German Confidence Drop sees EUR/USD near 1.37 – MarketPulse
• Greece Posts 1.05 Billion EUR Budget Surplus – MarketPulse
• German Central Bank Ready To Back ECB Policy Play – MarketPulse
• Euro Equities Advance To A Six-Year High – MarketPulse
• Russia Tells Ukraine Gas Hike To Be Negotiated After Outstanding Debt Paid – MarketPulse
• IMF’s Lagarde Says European Crisis Not Over Yet – MarketPulse
• UK PM Bullish on Deal With European Union – MarketPulse
• Ukrainian Rebels Declare Victory on Self-Rule – MarketPulse

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