What Are The Markets Facing?

The 4:30 EDT release of the minutes from the Bank of England’s July meeting – when the Monetary Policy Committee left rates unchanged at 5.00 percent – presents major event risk for UK assets, as they are likely to reflect much of the same mixed sentiment seen in the meeting minutes from June. Indeed, the minutes showed that in June, CPI "developments...had meant that the risks to inflation in the medium term had moved further to the upside," and that some members had taken this evidence to be enough to "consider whether an immediate rise in Bank Rate was warranted." However, they also feared that a surprise hike “might be counter-productive by appearing to exaggerate the Committee’s concerns about the medium-term prospects for inflation.” Furthermore, the downside risks for growth in the UK loom large, and though “a recession…was not the central expectation, there was a small but growing risk of a very negative outcome that would cause inflation to undershoot the target in the medium term.” As a result, MPC member David Blanchflower voted in favor of a 25bp cut in June, and likely did the same in July. However, if the vote count actually shows that the decision to leave rates steady was a unanimous vote, or if there were any votes for a rate increase, the markets will likely move to price in higher interest rates. Nevertheless, the risk may be in favor of a surprising second vote for a rate cut, given the dour economic conditions in the UK.

Bonds – Long Gilt Futures

Long Gilt futures have bounced from trendline support this week, but the upcoming release of the BOE’s meeting minutes from July could make or break the contract’s recent gains. Indeed, if the minutes surprisingly show a unanimous vote for unchanged rates or one or more votes for a rate hike, Gilts could fall back toward 105. On the other hand, one or more votes for a rate cut in July could be enough to lead Gilts above near-term resistance to target 107.

FX – GBP/USD

GBP/USD continues to hold within a rising channel, but if the pair closes below the 200 SMA at 1.9953 today, the move may signal greater declines toward at least 1.9850. Upcoming event risk includes the release of the Bank of England’s meeting minutes from July, as the vote count and commentary from the meeting could lead rate expectations for the bank to shift. The Bank of England Monetary Policy Committee is expected to have left rates unchanged at 5.00 percent based on an 8-1 vote, with super-dove David Blanchflower serving as the sole dissenter. However, if there is an additional vote for a rate cut, GBP/USD could easily sell off. On the other hand, a vote for a rate increase, or simply hawkish commentary within the minutes could lead the pair toward 2.00 once again.

Equities – FTSE 100 Index

The FTSE 100 has surged in recent days, but pulled back from resistance at 5,415 on Tuesday as the financial sector remains jittery. Indeed, the index could give up more of its gains on Wednesday as the minutes from the BOE’s meeting in July will be released. The news will likely be bearish for UK equities, as economic conditions in the country continue to deteriorate and are likely to get worse. As a result, the FTSE 100 may tumble toward 5,200 regardless of the vote count.

Terri Belkas is a Currency Strategist at FXCM.