Sterling Soars After Hawkish Shock in MPC Minutes

Sterling soars sharply higher today after MPC minutes revealed a much
tighter than expected vote to keep rates unchanged at 5.5% in June. While
market expected a 7-2 vote split, 4 members, including Governor King, voted in
favor of an immediate hike. The other dissenters were John Gieve, Tim Besley, and Andrew Sentance, making it a 5-4 vote split. King in the minority camp for the first time since August 2005, when the MPC cut the base rate to 4.5%. High house-price gains, strength of corporate investment, only a tentative slowing in private spending growth, rapid rises in money and credit, and finally the renewed strength in oil prices were the major reasons that the four saw no compelling reason to wait and voted for an immediate hike. Today’s minutes reinforces speculations that BoE could raise rate again in July. Moreover, interest-rate futures now show investors expect interest rates to continue rising beyond 5.75% with implied rate on the Dec interest- rate futures contract rose 6.22%.

Elsewhere, Canadian dollar retreats sharply after whole trade disappoints by falling -3.1% in Apr comparing to expectation of 0.5% rise. Swiss franc continues to ride on today’s strong combined PPI and strengthens against dollar and euro. Meanwhile, the Japanese yen gives up earlier gain and weakens again into US session. No important economic data is scheduled from the US today. Markets’ focus may turn to Treasury Paulson’s testimony on international financial system as well as Yellen and Fisher’s speeches.


Daily Pivots: (S1) 1.9843; (P) 1.9865; (R1) 1.9908; More

Cable’s strength continues as expected and breaks mentioned short term falling trend line resistance (now at 1.9916) and 161.8% projection of 1.9621 to 1.9783 from 1.9657 at 1.9919. At this point, intraday bias remains on the upside as long as 1.9869 minor support holds. Key near term structural resistance of 1.9968 will be in focus. On the downside, below 1.9869 will turn intraday outlook consolidative first and probably bring pull back towards 4 hours 55 EMA (now at 1.9800). However, break of 1.9657 support is needed to signal the completion of corrective rise from 1.9621. Otherwise, another rally is still in favor.

In the bigger picture, cable is still supported by mentioned medium term rising channel (now at 1.9669). Firm break of 1.9968 resistance will confirm that fall from 2.0132 was merely a correction to the medium term rally and has already completed at 1.9621 after touching the rising channel. In such case, further rise is should be seen to retest 2.0132 high, with much odds of extending the rally to 61.8% projection of 1.9813 to 2.0132 from 1.9621 at 2.0207 first.

However, we’d maintain that risk of medium term reversal remains high, in particular with bearish divergence condition remains in weekly MACD and RSI, as well as daily MACD. But sustained break of the medium term rising channel support is needed to confirm that the whole rally from 1.8090 has completed and add much credence to the case that an important medium term top is already formed at 2.0132. Much deeper decline should then be seen in medium term, towards 1.9183 low first.

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Shing-Ip Tsui is the founder and CEO of ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.