The minutes of last month’s BOE Monetary Policy Committee meeting revealed a far closer vote to raise rates than the market anticipated, indicating that the UK Central Bank maintains its hawkish bias even in the face of cooler inflation gauges and slowing consumer demand. The MPC voted 5-4 to keep rates steady in June against expectations of a 7-2 vote by most market analysts. Governor King who voted for a hike found himself with the minority for the first time since August of 2005.

Cable was further boosted today by news that UK Money Supply expanded at 13.8% annual rate rather than the 13.4% projected. The relentless growth in money supply figures offers perhaps the strongest reason for pound bull’s position that the BoE will hike rates further in the near future. However, the BoE is the most flexible as well as volatile central bank amongst the major monetary policy makers with most MPC members basing their opinion on empirical data rather than economic orthodoxy. Therefore it is quite probable that many of the same MPC members may quickly change their stance to a more dovish posture if inflation and consumer demand data shows further slowdown in the month to come.

Nevertheless, with oil prices hovering at $69/bbl, housing continuing to post double digit gains and money supply expanding way beyond the BoE comfort level, the benefit of doubt must go to pound longs as the present operating assumption in the market is that BoE may go to 5.75% as early as next month if the economic data remains relatively robust. Sterling easily cleared the 1.9900 level on the news and could target to 2.000 figure before end of the week as currency market begins to price in 5.75% rates.

Meanwhile in Switzerland PPI prices printed at twice the expected rate gaining 0.9% vs. 0.4% forecast. In retrospect, given the weakness in the franc and the persistently high energy prices the increase in the Swiss price levels was not surprising. It was however quite important to the market. A greater than expected rise in inflation gauges is the only economic factor that is likely to motivate the SNB to raise rates by 50bps points rather than the standard 25bp at the next meeting in September.

EURCHF which only yesterday reached record highs traded down on the news dropping to 1.6610. Still the pair continues to be driven by huge momentum from the carry traders and it is far from clear whether tonight’s news was enough to have reversed the one way price action of the past several months. The key to direction in the pair will be market’s expectations regarding the immediacy of another ECB rate hike. To that end this week’s IFO may be the critical economic release that sets tone in trading not only the EURUSD and EURCHF, but given tonight’s hawkish BoE news in EURGBP as well.

Boris Schlossberg is a Senior Currency Strategist at FXCM.