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Talking Points:

- BoE remains in neutral as inflation counters labor, growth progress.

- Both GBPCHF and GBPUSD are in tenuous positions.

- See the DailyFX Economic Calendar for Wednesday, July 10, 2014.

The expectation for an interest rate hike in the first half of 2015 has only grown each time Bank of England Governor Mark Carney has spoken in recent weeks. This shouldn’t be a surprise, though: the British Pound TWI (trade-weighted index) has rallied to its highest levels since late-2008 on the back of a steeper Gilt yield term structure, with 2-, 5-, and 10-year swap differentials widening out consistently since Governor Carney took stewardship of the Bank of England in July 2013.

In his June 12 Mansion House speech, Governor Carney raised eyebrows when he indicated that interest rate hikes “could happen sooner than markets currently expect.” Market participants haven’t necessarily taken this as a guarantee that an interest rate hike is coming in the first quarter of 2015 or sooner; overnight index swaps have gyrated since the mid-June speech but still only see less than a 20% chance of a rate hike in the fourth quarter of 2014.

There clearly is a missing component here. Growth is surging; growth indicators see further improvements in growth; employment trends are pointing higher; and the Bank of England is clearly shifting its rhetoric in a more hawkish direction. The absence of inflation from this discussion is meaningful.

See the video for trade setups in GBPCHF and GBPUSD around the Bank of England (technicals start around 2:56).

Read more: Short-term Reversals Develop in GBP-crosses - Sell Highs or Buy Dips?

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