Preview: Bank of England Minutes

Talking Points

• Consumer Prices Slow to 3.1 Percent in July

• Andrew Sentence Likely to Call for a Rate Hike

Inflation has surpassed 1 percentage point of the central bank’s target for a fifth straight month, leading BoE’s Governor, Mervyn King to write a letter to the Chancellor of the Exchequer George Osborne. Mr. King noted that “much of the current high level of inflation can be attributed to the increase in VAT in January 2010, past rises in oil prices and the continued pass –through of higher import prices following the depreciation of sterling since mid – 2007.” The central bank head went onto reiterate that the MPC stands ready “either to expand or to reduce the extent of the monetary stimulus as the outlook demands.” Looking ahead, the increase in the value added tax measures for 2011 to 20.0 percent from its current level of 17.5 percent will likely cause consumer prices to remain higher than the central bank’s forecast for longer than previously projected. With the short term outlook clarified, market participants will keep a close eye on the news wire to see where the committee expects inflation beyond 2011, in particular, three years. This is of great interest in that during that time period, changes in policy will have likely filtered through the economy.

Taking a look at last month’s meeting, Andrew Sentance was the lone dissenter, voting for a rate hike of twenty five basis points to 0.75 percent. It is noteworthy to highlight the fact that although most of the committee decided to keep rates unchanged; policy members noted that the planned increase in the value-added tax rate will add upward pressure onto inflation. At the same time, the committee considered both arguments regarding monetary tightening and easing. In turn, certain members decided that it was appropriate to keep policy unchanged August. Now GBP traders are at the crossroads as it is becoming increasingly apparent that the split amongst the committee is increasing, with some members becoming slightly hawkish.

All in all, if traders witness that the decision to keep rates unchanged at 0.50 percent and the asset purchase program was skewed to the right more than the previous decision, the British Pound will likely rally going into the North American trade.

Prepared by Michael Wright

British Pound at the Crossroads. The GBPUSD has maintained its rising trend since June to recently break above the 200-day moving average. After trading in overbought territory, the pair has reversed course to hover above 1.550 to once again test the trend line. Traders now turn to the BoE minutes for next moves in the British pound. A hawkish tone from the committee may set up a potential profitable long entry position.

Written by Michael Wright, Currency Analyst To Receive Future Articles by Email, please contact me at mwright@fxcm.com Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Intraday Trading,Weekly Spotlight, and Forex Trading Weekly Forecast