Sterling Sinks as Carney Culls Hopes of BOE Rate Hike


Talking Points:

GBP/USD back near post-UK election lows after BOE Governor Carney’s Mansion House speech this morning.

– DXY Index a touch higher at the time of writing; look for Fed speakers to drive volatility today and the rest of the week.

The retail crowd is still net-short AUD/USD, EUR/USD, GBP/USD, and net-long USD/JPY, although positioning has abated in recent days.

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The US Dollar (via DXY Index) is trading slightly higher on balance this morning, even as pairs like EUR/USD trade higher and USD/JPY trades flat to lower. The source of DXY strength is rooted in British Pound weakness, which has now given up all of its gains since Thursday’s Bank of England policy meeting, finding itself back near its post-election lows versus the greenback and the Euro.

While the BOE’s rate decision last week sparked speculation that a rate rise could be nearer than previously thought, Governor Mark Carney poured cold water all over those hopes this morning at this Mansion House speech. Of note, the governor said, “From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anemic wage growth, now is not yet the time to begin that adjustment.

It seems that the market is coming to its senses after the 5-3 vote last Thursday. There are several factors working against the BOE’s ability to raise rates. First, one of the dissenting voters, Kristin Forbes, is leaving at the end of this month, and will be replaced by Silvana Tenreyro. While Forbes has spent her time talking up concerns about inflation, Tenreyro is known for her academic interest in negative interest rates (NIRP), which is considered an extremely dovish policy outcome. By all indications, Tenreyro will be much more dovish than her predecessor.

Second, inflation readings look set to peak this summer, now that the year-over-year base effect of Brexit on the GBP exchange rate will be far less substantial and now that oil prices have started to slide. Finally, with the Brexit negotiations in the balance, the fragile Tory-DUP alliance could break, forcing another general election (and thus, increase uncertainty) for the UK.

Aside from BOE Governor Carney cooling rate hike hopes this morning, there has been chatter (according to Bloomberg News) that the UK could face another credit rating cut from Standard & Poor’s irrespective of how the Brexit talks go. Recall that the UK lost its ‘AAA’ rating from S&P last summer after the June 2016 Brexit vote. Another rating cut could put more focus on UK Prime Minister Theresa May, who is under a great deal of pressure for how her party lost seats in the recent election.

See the above video for technical considerations in EUR/USD, GBP/USD, USD/JPY, Gold, Crude Oil, EUR/GBP, NZD/USD, and the DXY Index.

Read more: FX Markets Turn to Central Banker Speakers, RBNZ Decision, Canadian CPI

— Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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