Central Bank Meeting Minutes May Hurt Pound, Boost US Dollar

Separate publications of minutes from the latest Bank of England and Federal Reserve policy meetings may hurt the British Pound and boost the US Dollar.

Talking Points:

• BOE May Meeting Minutes May Disappoint Hawks, Weighing on the Pound    

• US Dollar May Get Another Push Higher from Pro-“Taper” FOMC Minutes    

• Yen Gains After BOJ Rate Decision, Aussie and Kiwi Fall on Risk Aversion

The release of minutes from this month’s Bank of England monetary policy meeting headlines the economic calendar in European trading hours. As we discussed in detail last week in anticipation of the central bank’s quarterly Inflation Report, the thinking on the rate-setting MPC committee may be far less hawkish than the markets are primed to hear. With that in mind, rhetoric pushing back against near-term interest rate hike expectations in today’s release may weigh on the British Pound and we remain short GBPJPY.

Later in the day, the spotlight turns to what may prove to be the week’s most impactful bit of scheduled event risk: minutes from April’s Federal Reserve meeting. Traders will be keen to gauge policymakers’ confidence in QE reduction continuity amid what looks like a re-acceleration of US growth. Recognition of this transition in its infancy would go a long way toward brandishing the Fed’s ability to read the business cycle, bolstering the central bank’s credibility and scattering doubts about the likelihood of an end to asset purchases by autumn.

Unencumbered speculation about the culmination of QE and the commencement of interest rate hikes thereafter bodes well for the US Dollar against its leading counterparts. In fact, technical positioning hints a trend change is afoot. Fears of ending stimulus may likewise trigger broader-based risk aversion across the financial markets, a scenario that bodes ill for higher-yielding and cycle-sensitive currencies. We are still holding short AUDUSD and have now entered long USDCAD.

The Japanese Yen narrowly outperformed in overnight trade after the Bank of Japan opted to keep monetary policy unchanged as expected, disappointing bets on an expansion of stimulus. The Australian and New Zealand Dollars came under pressure as Asian stocks edged downward, undermining demand for the sentiment-linked currencies. Japanese shares led the way lower among the region’s top bourses, with the benchmark Nikkei 225 index down as much as 0.5 percent.

Critical Levels