The outlook for sterling following BoE Meeting Minutes

18th June 2014

BoE Meeting Minutes: Sterling Outlook – 18/06/14

Sterling-dollar actually ended lower after the release of the Bank of England minutes. Carney’s Mansion House speech had many market participants pricing in the first vote for rate rises in this release and the risk to sterling heading into the meeting was already to the downside, with sterling long positions stretched.

Euro-sterling had the most surprising reaction to the release, up 0.2% from its opening position. While some of the moves higher in the cross were due to the minutes being underwhelming, euro-sterling has been edging higher over the last three sessions.

The reality is that the most severe period of euro weakness, following the ECB’s June policy decision, is now over. This is most evident in the euro-commodity currency crosses, which have rebounded since late last week. Initial speculation that the euro would be used as the commodity currency has proved anything but true and the new bout of geopolitical tension in Iraq shows that we are still not in a carry trade environment.

Stabilising Eurozone money market rates alongside ECB deposit levels means the initial bout of euro weakness is over. Despite calls to the contrary, diverging monetary policy is not the key driver of euro-sterling. Euro crosses have never traded on diverging central bank policy but on capital flows. This explains why euro-dollar was up at $1.39 when the Fed was contemplating rate hikes and ECB was contemplating QE.

While we can expect the Bank of England to be increasingly hawkish in the second half of 2014, this will have limited impact on the EURGBP cross. The EURGBP downside risk is likely to be limited to £0.78 and likely to trade back to £0.82 by year-end. It could well be a smart time to play a hawkish Bank of England in the sterling-dollar cross, where diverging monetary policy is a more important driver.