By DailyFX – As expected the Bank of England hiked its overnight rate by 25bp to 5.75% expanding its interest… … rate advantage against the dollar, euro and the yen, but in its post rate hike statement the UK central bank tempered its hawkishness by noting that, CPI inflation is likely to continue to fall back to around the 2% target in the course of this year.

Still the MPC members left the possibility of further rate hikes
on table by stating that, Credit and broad money continue to grow
rapidly. The pace of expansion of the world economy remains
robust .Although pay pressures remain muted, the margin of spare
capacity in businesses appears limited and most indicators of pricing
pressure remain elevated.

From the wording of the statement it is clear that UK central bankers
continue to be concerned about the double digit growth of the countrys
M3 money supply and will remain vigilant in containing further credit
expansion. Therefore, while for the time being the BoE appears to be
sidelined, chances are good that it will raise rates once again to 6%
level before the years end and this theme should provide support for
the pound against the other majors over the next several months.

In the near term the currency could come under some profit taking
pressure in a classic buy the rumor sell the news dynamic. Indeed, the
unit had a very hard time breaking above the 2.0200 barrier in the
aftermath of the release and was actually pulled lower right after the
news before rebounding smartly. Whether it can clear the 2.0200 level
and head higher from here, will depend in large part on US data in the
next two days.

If both ISM services and the NFP miss their targets the pound could
well catapult higher, zeroing in on the 2.0500 figure. If US economy
show material signs of slowdown, the pound will effectively become the
only show in town for speculative capital seeking to capture ever
increasing yields. If on the other hand, the market sees some positive
news out of the US docket, cable could come in for a round of profit
taking as traders will reason that BoE will stand down for at least
several months in a row before implementing further rate hikes.
Nevertheless, the pivotal 2.000 level which only a short while ago was
considered to be resistance in the pair, will now become support as
relative growth and relative interest rate differentials make cable the
magnet of speculative order flow in the currency market for the time
being.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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