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Cable Regains Footing as BOE Minutes Point to Early Rate Hike

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Cable Regains Footing as BOE Minutes Point to Early Rate Hike

The British pound advanced against its US counterpart Wednesday, hitting an intraday high of 1.6993 after the minutes of the June 4-5 Bank of England meetings showed policymakers were moving closer to a rate hike.

The GBPUSD traded within a range of 1.6932-1.6993. The pair consolidated at 1.6954 in the North American session, down 0.04 percent from the previous close. The trend line shows initial support at 1.6937 and resistance at 1.6989.

Cable exceeded 1.70 Monday to set a new five-year high on the heels of hawkish comments from Bank of England Governor Mark Carney, who said last Thursday the central bank could begin raising interest rates sooner than expected. Cable pulled back from its five-year high Tuesday after UK consumer inflation weakened in May.

UK consumer price inflation dropped to 1.5 percent in the 12 months through May, official data showed.

In policy news, the minutes of the June 4-5 Monetary Policy Committee meetings suggested officials were moving closer to voting for a rate hike. Policymakers were concerned the markets underestimated the probability of a rate hike in 2014, which likely reflects subdued expectations about economic growth in the second half of the year.

In this context, “the relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising,” the minutes said.

All nine members of the MPC voted to keep monetary policy unchanged in June, adding there remains “considerable uncertainty” about the amount of spare capacity in the economy.

“That uncertainty had been reinforced by the contrasting trends in the economy since August 2013, when the Committee had set out its forward guidance strategy,” the minutes said.

“On the one hand, output growth had been stronger, and unemployment had fallen faster, than had been anticipated by the MPC and most other forecasters. On the other hand, wage growth and inflation had been weaker.”

The GBPUSD risks a pullback later in the day as the Federal Reserve unveils new economic projections and cuts the pace of bond buying by another $10 billion.

In economic data, the Office for National Statistics will report on retail sales Thursday. Retail sales in May are forecast to have declined 0.5 percent. Year-on-year, this translates into a gain of 4.3 percent.

In other trading, the euro rebounded against the pound, with the EURGBP advancing 0.35 percent to 0.8012. Initial support is likely found at 0.7974 and resistance at 0.8005.

The EURGBP was trading at its weakest level in 19 months on Monday, as UK and Eurozone monetary policy continued to point in opposite directions.

The European Central Bank’s decision to cut interest rates to all-time lows and introduce a negative deposit rate has kept downward pressure on the euro. Escalating violence in Iraq has also pressured the common currency by increasing demand for safe haven assets.

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