Wednesday June 22, 2005 - 10:45:14 GMT
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Cable Swan Dives On MPC Minutes
The shocker of the night in the FX market was the release of Bank of England Monetary Policy Committee minutes for the June 8-9 meeting which indicated that 2 of the 9 members voted to cut rates by 25bp to 4.5%. The market had expected a unanimous 9-0 vote for keeping rates steady. The pound reacted instantly, dropping more than 100 points in a matter of minutes. With the Federal Reserve expected to raise interest rates yet another 25bp at the next FOMC meeting on June 30th traders now fear that they may have under priced the risk of interest rate convergence between cable and the greenback. However, before full panic sets in we must point out that at the time of the MPC meeting oil was trading at $52/bbl rather than $60/bbl and may not have been as important a factor in the BOE decision making process as it would be today. Furthermore, Marian Bell one of the 2 votes for a rate cut, is generally considered to be one of the more dovish members of the MPC and will be replaced by David Walton as of July 1.
Nevertheless, the surprise vote had a tremendous impact on market psychology and the euro also lost strength as well, dropping 50 points as fresh speculation about pressure on ECB to cut rates made the rounds of the dealing desks. European eco data was mixed to mildly positive with Trade Balance slipping to 3.7 Billion euros from 4.4 Billion in period prior, but New Industrial Orders jumping up markedly to 1.5% versus –0.5% projected. As we’ve argued in the past, the lower euro is helping EU manufacturers in their business rebound. We continue to believe that talk of EU rate cuts are a red herring in light of weaker EU currency and higher oil prices. Instead we believe that the market may be underestimating the weakness of US manufacturing demand as all economic gauges are flashing yellow. If US manufacturing demand does slow the Fed would be very hard pressed to maintain its “measured rate” policy and dollar bulls will lose the foundation for their trade.
FX Spot Overnight
- EUR drops to 2140 in sympathy with pound
- JPY rises to 108.75 on dollar strength and soft Trade data
- GBP pounded to 8198 on 7-2 MPC vote
- CHF at 2685 after pound move
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