DislikedToday was a chance to see how one fundamental drives 2 different currency pairs:
Bank of England policy makers voted 8-1 to keep its benchmark rate at a five-year high of 5.25 percent this month. David Blanchflower unexpectedly made the first call for a rate cut since May.
The dovish minutes casused the GBP/USD to go down and caused the GBP/JPY (and the FTSE) to go up. Why might this be the case?
The GBP/USD pair is an interest rate driven pair, while the GBP/JPY is a flow of funds driven pair.
Let me expalin what I mean by flow of funds. As it becomes apparent that interest rates are not to be raised in the future, the investment climate is improved as a more accomodative monetary policy stimulates the appetite for risk and investment. Funds will flow into an enviorment like this. In this case, becasue the Yen is a funding currency for all types of investments, money will flow from Japan to the UK.
The reaction to the minutes was somewhat tempered today by the last UK CPI numbers; the minutes may actually be a bit outdated, but they certainly indicate the BoE would much prefer to not have to rasie rates further. I base this also on what the bank has said recently: they see inflation going down in no uncertain terms. If the CPI numbers had printed better, I believe we would have seen much more movement in these pairs and in the FTSE as well.Ignored