Is BoE Moving Towards a Hike?

Market Drivers for May 21 2014

BoE notes its view of UK economy is “balanced” sending cable through 6900
Kuroda, bullish sends USD/JPY through 101.00
Nikkei -0.24% Europe .04%
Oil $103/bbl
Gold $1294/oz.

Europe and Asia:

EUR Current Account 18.8B vs. 24.2 B
GBP UK Retail Sales 1.3% vs. 0.4%
GBP BoE 0-0-9

North America:

USD FOMC Minutes 14:00

Cable soared through the 1.6900 figure on the back of slightly more hawkish MPC minutes and much better than expected UK Retail Sales data but was unable to hold the level in mid-morning London trade as profit taking overwhelmed the pair.

The release of the BoE minutes noted that all members agree that they need to see more evidence of slack reducing before raising rates, however, decision on whether to raise rates was now ” more balanced” for some members.

The market reacted with particular vigor to the suggestion in the minutes that the more gradual the rise in rates the earlier BoE need to start the process in order to rebalance the rates. This indicates that at least some of the MPC members are considering the possibility of a rate hike sooner than the expected Q1 of 2015 date.

Cable also received a boost from much stronger than expected UK Retail Sales numbers which rose 1.3% versus 0.5% expected. There may have been some seasonal exaggerations due to Easter, but nevertheless the retail figure was the best since 2004 and confirms that the growth in UK economy continues to outpace all other G-7 members. With UK fundamentals remaining positive it is now only a matter of time before cable hits the 1.7000 figure.

Meanwhile in Japan BOJ governor Kuroda offered a surprisingly upbeat assessment of the monetary policy noting that the central bank is half way on its mark towards achieving 2% inflation. He specifically noted that the BOJ will not link monetary policy to economic growth and that BOJ is not focused on influencing FX rates. Overall this was a far more hawkish press conference than the market expected and it sent USD/JPY to a low of 101.81 before the pair found some support.

The laissez faire attitude of the BOJ towards the FX exchange rate indicates that shorts now have a green light to test the key 100.00 barrier over the near term horizon and the downside pressure will no doubt begin to build, especially if US rate continue to hover near the 2.50% level.
Today’s North American trade only carries the FOMC minutes which are unlikely to provide much surprise and should confirm that the Fed will remain stationary for the time being. With several Fed members speaking today as well the dollar could see further weakness if they reaffirm the view that US rates are likely to remain low for a considerable period of time.