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Carney Speech Triggers Pound Sell-Off

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Carney Speech Triggers Pound Sell-Off

The British pound came under pressure Friday after Bank of England Governor Mark Carney put to rest growing speculation interest rates may rise sooner than initially expected.

In a speech to the World Economic Forum in Davos, Switzerland, Carney acknowledged UK unemployment was falling much faster than initially forecast. Rather than raise interest rates, the Monetary Policy Committee will instead revisit its forward guidance strategy in February. The MPC made unemployment the lynchpin of monetary policy last August when Carney announced the central bank wouldn’t even consider raising interest rates until unemployment fell to 7 percent. Since the August announcement, UK unemployment has fallen 0.7 percentage points to 7.1 percent.

“Last August the Bank’s Monetary Policy Committee made an easy call,” Carney said in his speech, alluding to the 7 percent unemployment target. “A few quarters of above-trend growth driven by household spending represent a good start, but they aren’t sufficient,” Carney added.

MPC policymakers are under pressure to spell out how the BOE intends to steer the markets after its initial guidance attempt. Carney remained vague about exactly how the Bank’s guidance will “evolve” in February when it releases the Inflation Report.
The British pound faced steep declines in the forex markets, as investors re-evaluated their stake in the UK currency. The GBPUSD pair had fallen 139 pips as of the early North American session. The pair hit a session low of 1.6488 before consolidating closer to the 1.65 handle.

The EURGBP cross took advantage of Carney’s dovishness, surpassing 0.83 for the first time in one week. By the early North American session, the pair had risen 65 pips to 0.8296.

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