MAY 21
BOE Meeting Minutes (8:30 GMT; 4:30 EDT)
FOMC Meeting Minutes (APR 29/30) (18:00 GMT; 14:00 EDT)

What Are The Markets Facing?

The release of the minutes from the Bank of England’s May meeting – when they left rates unchanged at 5.00 percent – presents major event risk at 4:30 EDT as they are likely to reflect much of the hawkish sentiment in the Quarterly Inflation Report, in which BOE Governor Mervyn King said "it is likely that, with inflation above 3 percent for several quarters, I will be required to write a number of open letters to the Chancellor over the next year." However, downside risks for the economy loom large as the same report said, “rising energy and import prices will almost certainly push inflation up further, possibly significantly, in the coming months. As those price increases feed through to household bills, they will lead to a squeeze on real take-home pay which will slow consumer spending and output growth, perhaps sharply. So the balancing act faced by the Monetary Policy Committee is even more challenging than it was in February.” However, it will be important to watch not only where the BOE’s concerns lie, but also the vote count. The May rate decision likely had at least one vote from über-dove Blanchflower for a 25bp rate reduction, and the more votes in favor of a more accommodative monetary policy, the more the markets will bet on a rate cut by the BOE in June.

During the US trading session, the minutes from the FOMC’s April 30 meeting will be released at 14:00 EDT. In that meeting, the Fed cut rates by 25bps, though indications that they would pause at their next meeting led the US dollar to rally the following day. The key thing to watch for in the release of the minutes is the commentary amongst the FOMC members regarding inflation, especially given rocketing energy and food prices. Currently, futures are betting that the Fed will leave rates unchanged in June, and are only pricing in a 14 percent chance of a 25bp cut. However, if the FOMC members brush off the inflation factors and focus instead on shaky financial markets and the US economic slowdown, futures may start to become more aggressive in pricing in a June rate cut.

Bonds – Long Gilt Futures

Gilts have fallen in recent weeks to consolidate within a falling wedge, which is typically a bullish formation. Near-term support rests at 107.00/12, though more substantial support sits at the 61.8 percent fib of 102.90 - 112.57 at 106.59. The release of the minutes from the BOE’s May meeting could lead Gilts to bounce, especially if the news reveals that there was more than one dissent in favor of a 25bp cut. On the other hand, a pronounced focus on upside inflation risks could weigh the contract down for another test of 107.

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 May meeting minutes show more than one dissenting vote in favor of a 25bp cut, the GBP/USD pair could pull back from immediate resistance at 1.9700. 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 25bp cut, the harder GBP/USD will fall. On the other hand, if the decision to leave rates steady at 5.00 percent was a unanimous decision, traders will start to bet that the Bank of England will not cut rates next month, which could lead GBP/USD to test 1.9750/9800 in the near-term.

However, we also need to take into account the release of the FOMC meeting minutes from April 29/30 during the US trading session, as this could be particularly market-moving for the US dollar. The key thing to watch for in the release of the minutes is the commentary amongst the FOMC members regarding inflation, especially given the rocketing energy and food prices raise. Currently, fed fund futures are betting that the Fed will leave rates unchanged in June, and are only pricing in a 14 percent chance of a 25bp cut. However, if the FOMC members brush off the inflation factors and focus instead on shaky financial market conditions and the significant US economic slowdown, futures may start to become more aggressive in pricing in a June rate cut, which could weigh heavily on the US dollar.

Equities – FTSE 100 Index

The FTSE 100’s consolidation within a rising wedge is likely to resolve soon with a bearish break below near-term, critical support at the confluence of a rising trendline and the 200 SMA at 6,175/90. The upcoming release of the minutes from the BOE’s May policy meeting could weigh the FTSE 100 toward 6,000, especially if the central bank focuses on the UK’s economic slowdown and on the risks to the credit market. On the other hand, if the minutes reveal that the BOE holds remotely optimistic sentiment on the economic and financial market situation, the FTSE 100 could hold above near-term support for the time being.

Terri Belkas is a Currency Strategist at FXCM.