BOE Minutes Preview: Real Wages are Really Important

Trade in GBPUSD has been undeniably lackluster to start this week, with rates contained to just a 60-pip range thus far, but volatility in the GBPUSD will almost certainly pick up substantially heading into the latter half of the week. While classic stalwarts like Retail Sales (Thursday) and Preliminary GDP (Friday) are sure to be market-moving one way or another, tomorrow’s BOE Minutes may be the most important event for traders to monitor.  

A little over a month ago, BOE Governor Carney hinted that the central bank may raise interest rates “sooner than markets currently expect,” fueling a firestorm of rate hike speculation and driving the GBPUSD to a 6-year high. Though he later walked back the comments slightly, the market is now open to the possibility of a BOE rate hike later this year, and the BOE’s statement will be interpreted through that lens.

The key variable to watch will be the BOE’s view on wage growth and inflation. Despite solid growth in the overall number of jobs, UK workers have not seen a commensurate increase in wages, with salary growth trailing even the country’s subdued inflation rate. According to data released since the BOE meeting, inflation rose to 1.9% y/y, hotter than the 1.6% that traders and economists had been expecting. Meanwhile, wage growth was surprisingly weak at just +0.3% in May, taking the shine off an otherwise strong jobs report last week.

As long as the central bank remains concerned with falling real wages in the UK, traders may sell the pound on a decreased likelihood of a rate hike in 2014. On the other hand, if the statement suggests that inflation and wage growth are expected to increase imminently, the market may bring forward its expectation of the first interest rate hike to Q4 of this year, and the pound may rise as a result. Beyond the first rate hike, traders will also watch the overall tone of the statement for any hints about the pace of subsequent interest rate rises moving through 2015.

Moving forward, traders should also watch the changing composition of the BOE’s voting members. The bank has already swapped hawks with Andy Haldane’s recent replacement of Spencer Dale. Last year, Haldane warned the Treasury Committee of the risks of the bank’s QE program, stating that the BOE has “intentionally blown the biggest government bond bubble in history." Meanwhile, two relative unknowns, Nemat Shafik and Kirstin Forbes, will ascend to the bank’s policymaking board next month, so any changes to monetary policy will almost certainly wait until the full complement of bankers is on board.

When it comes to the GBPUSD, the 1.7040 level will be a critical pivot for the rest of the week; for more on this level and the pair’s technical outlook, see my colleague Fawad Razaqzada’s note from earlier today