Euro and Pound Gun for Yearly Highs

The voting result was expected, but the hawkish tone of the discussion, with MPC members suggesting that future risks lay more to the upside, helped fuel the pound higher with traders abandoning any expectation of a rate cut by the Bank in Q2. In fact BOE expected growth to stay on trend projecting 2.7% gains for the rest of the year. We remain skeptical about the MPC's optimism given the marked degradation in UK employment figures, but pound strength now emanates from dollar's weakness and the unit can rally further regardless of its own fundamentals.

The euro has also benefited from the rapid change in market sentiment as the release of FOMC minutes yesterday revealed a far more cautious attitude from the Fed than many market participants expected. The most dovish commentary came from Janet Yellen who noted that "I will be highly alert to the possibility of the policy tightening going too far." Clearly the housing slowdown is beginning to alarm the Fed as monetary officials do not wish to push the US economy into a recession on the cusp of mid-term congressional elections. Thus going forward they may indeed err on the side caution capping rates at 5%, with some market players now speculating that they may even remain at 4.75%. As always employment growth remains key to the whole scenario. If next months' NFP report prints below 200K the "5% and done" thesis is almost assured to be true. Meanwhile in the near term the markets are anticipating this course of events and taking the EUR/USD higher.