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Sterling Reverses After Carney’s Comments

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Sterling Reverses After Carney’s Comments

The Bank of England has taken a stand and has refused to consider an early rate hike given that the unemployment rate still relatively high near 7%. Carney, the head of the BOE has recently indicated the recovery needed to strengthen before he would consider higher rates.

This dovish stance was out of line with market expectations has sent cable lower and has inflicted much damage to the near-term outlook for sterling. Sterling initially rose to new two-year highs against the dollar in Asia and now has sold off through yesterday’s lows.

Carney has indicated that the BOE would update its forward guidance policy at next month’s quarterly inflation report, scheduled for February 12, 2014. He has already indicated that it is not just the unemployment rate, but that the BOE will look at overall conditions of the labor market. This suggests he is unlikely to simply lower than threshold as some have suggested.

In fairness the Carney has long maintained that thresholds are not triggers. It did its function and now the forward guidance, which we suggest is a communication policy not monetary policy, needs to be adjusted as the threshold has been approached.

chart-sterling-reverses-carneys-comments.png

The GBPUSD moved lower testing support near the 10-day moving average. A break of this level would likely test target support near 1.63. Momentum has flattened with the MACD printing near the zero index level. The RSI moved lower with price action and is printing near 55, which is in the middle of the neutral range.

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