BOE Minutes Say Members Discussed Rate Hike Underpinning GBP/USD

07/23/2015 9:00 am EST

Focus: FOREX

In this article, James Hyerczyk, at FXEmpire.com, outlines why he feels that the key force driving this forex pair remains the divergence between the European Central Bank and US Federal Reserve monetary policies.

The GBP/USD strengthened on Tuesday after minutes from a meeting of Bank of England policymakers showed support for an interest-rate hike. The minutes from the BoE’s monetary policy committee meeting in July suggested that more officials are in favor of a hike in the short-term. Previous minutes showed only two BOE policymakers wanted to hike rates immediately.

The minutes show that the BOE is shifting away from a neutral stance, and barring any geopolitical events or a steep drop in employment or consumer inflation, the central bank may be on track for a rate hike by the end of the year.

Last week, BOE Governor Mark Carney said the central bank might be willing to raise rates sooner than previously expected. It may even raise rates before the Fed, which would be bullish for the British pound.

The EUR/USD posted a slight gain earlier in the session, but investors couldn’t hold on to the gains. The recent price action suggests bottom-picking and aggressive short-covering were behind Tuesday’s surge since the fundamentals haven’t changed. The key force driving this forex pair remains the divergence between the European Central Bank and US Federal Reserve monetary policies.

In other news from the EuroZone, Italian Retail Sales came in below expectations at -0.1%. Additionally, the European Central Bank increased the emergency liquidity available to Greek lenders as the country’s lawmakers prepared for a second vote on a bailout package.

The BOE minutes helped weaken August Comex Gold futures because it revealed that more officials are in favor of a rate hike. Higher interest rates tend to be bearish for gold because it doesn’t pay interest or a dividend and costs money to store. The stronger US dollar also put pressure on gold.

The US dollar rose after US Existing Home Sales were reported better-than-expected. Traders were looking for a reading of 5.40 million units. The report showed a reading of 5.49 million units.

September Crude Oil futures weakened after the Weekly Energy Information Administration inventories report showed an increase of 2.5 million barrels. Traders were expecting a drawdown of 1.7 million barrels.

By James Hyerczyk, Analyst, FXEmpire.com

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