Bank of England Meeting Minutes (8:30 GMT; 4:30 EST)
Expected: 8-1 In Favor of -25bps, Dissent -50bps
Previous: 7-2 In Favor of No Cut

What Are the Markets Facing?

The release of the minutes from the Bank of England’s April meeting – when they cut rates by 25bps to 5.00 percent – presents major event risk for UK markets, as they are likely to echo much of the same wary sentiment reflected in the Monetary Policy Committee’s press release following the meeting. Indeed, the release noted that “(c)redit conditions have tightened and the availability of credit appears to be worsening…the prospects for output growth abroad have deteriorated…business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year.” It will be important to watch not only where the BOE’s concerns lie, but also the vote count. The April rate decision likely had at least one vote from über-dove Blanchflower for a 50bp rate reduction, and the more votes in favor of a more accommodative monetary policy, the more the markets will price in additional rate cuts by the Bank.

Bonds – Long Gilt Futures

Gilts have fallen significantly over the past week following the BBA’s announcement that a review of the system that sets Libor rates that was initially planned for June is now “currently under way” amidst increasing questions about its reliability and speculation that banks were underreporting the rates they pay to borrow. Indeed, a day after the announcement, Libor rates jumped to the highest levels since March 13 and weighed on Gilts, indicating that banks were rushing to report their borrowing costs more accurately. The December lows of 108.00 have thus far provided support, but Gilts have had trouble pushing above the 200 SMA at 108.54. Wednesday’s release of the Bank of England’s April meeting minutes could lead Gilts higher, especially if there was one or more vote in favor of a 50bp cut. On the other hand, a unanimous vote for the 25bp cut could lead the contract back down to 108, if not lower.

FX – GBP/USD

The GBP/USD pair continues to consolidate within a wide range, but with recent COT data showing the British pound at bearish extremes, the pair may be forming a short-term bottom and could ultimately push above the 2.00 level. However, if the Bank of England’s April meeting minutes show any dissenting votes for a 50bp cut, the GBP/USD pair could pull back to target near-term support at the 38.2 percent fib of 1.9599 – 2.0025 at 1.9860. Indeed, Monetary Policy Committee member David Blanchflower is one of the most dovish policy makers and has consistently voted for aggressive rate cuts, so he is the most likely candidate to be a dissenter. Additionally, the more votes in favor of a 50bp cut, the harder GBP/USD will fall. On the other hand, if the decision to cut rates by 25bps to 5.00 percent was a unanimous decision, traders will start to bet that the Bank of England will not cut rates again next month, which could lead GBP/USD to break above 2.000 to target 2.0090.

Equities – FTSE 100 Index

While the FTSE 100’s break above the psychologically important 6,000 level and the 100 SMA at 6,013 looks bullish, the index has had difficulty breaking above the late February highs near 6,100. On Wednesday, traders will see the Bank of England’s minutes from its April Monetary Policy Committee meeting. Recent instability in the banking sector has taken a toll on shares of financial institutions at a time when central bankers are scrambling to come to the rescue. Any indication of a bias towards future interest rate easing by the BOE could give a boost to the FTSE 100, though the gains may be short-lived as the equity markets remain overwhelmingly bearish.

Terri Belkas is a Currency Strategist at FXCM.