Talking Points:

British Pound Vulnerable with July BOE Meeting Minutes in the Spotlight
Australian Dollar Soars as 2Q CPI Data Inspires RBA Rate Hike Outlook
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Minutes from July’s Bank of England meeting headline the economic calendar in European hours. Monetary policy expectations remain firmly in control of price action. Indeed, the correlation between GBPUSD and the 2-year Gilt yield is now at 0.70, the highest in nearly three years (on 20-day percent change studies).

Commentary from Governor Mark Carney has offered mixed in recent weeks. The central bank chief said the markets were under-pricing the possibility of an interest rate hike this year, sending the British Pound sharply higher, only to walk back the comment days later. That has left Sterling adrift and waiting for direction cues.

With that in mind, traders will be keen to size up the voting pattern on the rate-setting MPC committee to see if unanimity in favor of the status quo was broken at July’s sit-down. While any votes in favor of a rate hike will have been in the minority, their emergence alone is likely to be interpreted as a de-facto hawkish posture shift and send the UK unit higher. Another 9-0 tally to keep things unchanged may yield the opposite result.

On balance, the case for a near-term tightening seems flimsy. UK economic news-flow has been deteriorating relative to expectations since late March. Meanwhile, June’s bounce in the baseline inflation rate (1.9 percent versus a 4.5-year low of 1.5 percent in May) masks a slide in price growth bets. Indeed, the 5-year “breakeven rate” – a measure of investors’ priced-in inflation outlook – has trended downward since April and now sits just above a four-month low. For the Pound, that seems to tilt surprise risk to the downside.

The Australian Dollar outperformed in overnight trade, rising as much as 0.4 percent on average against its leading counterparts. The rally followed the release of marginally upbeat second-quarter CPI figures. While the headline year-on-year inflation rate printed in line with expectations at 3 percent, the seasonally adjusted Trimmed Mean measure of “underlying” price growth trends topped forecasts to hit a four-year high of 2.9 percent. AUDUSD advanced alongside Australia’s 2-year bond yield, hinting the CPI data set inspired a hawkish shift in investors’ RBA policy outlook.

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