Pound Ratchets Higher on Hawkish Rhetoric

The pound saw the biggest action in overnight trade as hawkish rhetoric from BoE governor Mervyn King propelled the unit higher on speculation that the UK central bank may hike rates to 5.75% as soon as the next meeting of the Monetary Policy Committee scheduled for July 5th.
Speaking in front of the Confederation of British Industry Mr. King noted he MPC “will be watching closely indicators of capacity pressures, pricing intentions, and inflation expectations,” and that inflation expectations had “drifted up.”

Yesterday’s stronger than expected PPI input data and Governor King’s cautionary comments primed the market for a hot number going into tonight’s CPI report. However, when the data was released the numbers simply matched forecasts with year over year figures slipping to 2.5% – the lowest reading in 7 months – and the pound initially sold off on profit taking. But the unit did find support at the 1.9700 level helped in no small measure by an improvement in the Trade Balance figures which shrank to a deficit of -6316M from -7000M consensus estimate. The better than expected results were due to a decline in imports from China.

If tomorrow’s UK employment data surprises to the upside chances are good that BoE may back up its words with action at its next meeting in July. With oil prices above $65/bbl, price pressures are likely to persist in the system as food and transport costs continue to escalate. Given such a scenario the typically hawkish BoE may chose to act early to restrain inflationary impulses before they get out of control. All of this could prove beneficial to cable as the unit would move to a 50 basis point positive spread against the greenback if UK rates rise to 5.75%

In Europe today, the only report of note – Industrial Production – missed badly printing at -0.8% vs. 0.2% expected. However the euro was unmoved by the news partly because the French, Italian and German data had already come out over the past several days and the market was braced for the bad news. Furthermore, the month prior figures were revised upward taking some of the sting out of today?s negative results. The pair continues to shuffle along in narrow ranges as traders await tomorrow’s US Retail Sales data which will be the first market moving release of the week.

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Kathy Lien is the Chief Currency Strategist at

Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.