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Forex: Sterling better prepared

When the last UK Inflation Report was released three months ago, the Bank of England Governor did his best to convince markets that rates were going to remain low, but the reaction in interest rate and currency markets suggested otherwise. In the run up to today’s release, the question is to what extent markets have already priced in a relatively hawkish Inflation Report that prepares markets for the fact that rates are not going to remain low forever. Interest rate futures were rallying strongly in the run up to the last Inflation Report, pricing in lower UK rates. This time, they have been selling off, which has supported the gains on the currency and pushed cable to within a whisker of the 1.70 level. This makes the risk-reward this time around more towards a weaker currency, but that just based on the momentum going into the meeting. The bigger question is whether it is more down to the financial policy committee to act to cool the housing market, via the various measures available to them. This is a question that won’t be answered today, but is likely to remain a feature of the UK policy debate.  The initial focus to the upside for cable is at 1.6903 ahead of 1.70. Downside support seen at 1.6819 ahead of 1.6763.

Ahead of that is UK labour market data at 08:30 GMT, with US PPI data seen at 12:30 GMT. The main overnight focus has been with the continued strength of the Aussie in the wake of yesterday’s budget, the year high at 0.9461 not that far away. 

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