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Sterling Retreats as Carney Tempers Rate Hike Expectations

H.S. Borji
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Sterling Retreats as Carney Tempers Rate Hike Expectations

The British pound declined sharply Tuesday, easing off multi-year high against the US dollar after Bank of England Governor Mark Carney tempered expectations about a rate hike.

Cable declined 0.32 percent to 1.6975, falling further below the nearly six-year high set last week. The pair is testing initial support at 1.6979. Below that level the next support target is 1.6955, slightly below the ten-day moving average (1.6959). On the upside, initial resistance is likely found at 1.7075.

In US data, consumer confidence rose faster than forecast in June, the Conference Board reported today. The consumer confidence index increased from 83.5 to 85.2.

The EURGBP advanced 0.3 percent to 0.8013. The pair is currently testing the 0.8013 resistance. A break above this level would expose 0.8027 as the next resistance target. On the downside, technical support is likely found at 0.7983.

In Eurozone data, German business confidence declined in June, as the crises in the Ukraine and Iraq weighed on sentiment. The Ifo’s closely monitored business climate index fell from 110.4 to 109.7, below estimates.

Bank of England Governor Mark Carney said Tuesday the exact timing of the first rate increase would be “data driven,” a sign the central bank could be prepared to keep rates at record lows until 2015. Carney said the economy will probably grow at a faster rate in the second half of the year than the BOC had expected, but weak earnings growth suggests spare capacity still exists in the labour market.

“As the economy progresses, the time to normalize interest rates is edging closer,” Carney said in a lengthy testimony to the Treasury Committee.

“The path of interest rates is likely to be limited and gradual,” Carney also added.

Carney also attempted to clarify his earlier warnings that interest rates could rise sooner than expected. The head of the central bank said today those comments were made because the markets hadn’t yet adjusted to stronger economic growth.

Rate hike expectations pushed sterling to multi-year highs against the US dollar last week. Several market participants were eying the end of 2014 as a possible date for when the BOE could raise interest rates for the first time since March 2009.

In economic data, UK mortgage approvals declined at a slower rate than forecast in May. Approvals fell from 42,200 to 41,800, the British Bankers’ Association reported today. Economists forecast a drop to 41,300.

According to the BOE’s latest quarterly credit conditions survey, the UK’s biggest lenders are expecting mortgage approvals to drop significantly in the coming quarter, as banks lower their appetite for risk amid signs the BOE will begin to rein in the housing market.

Governor Carney on Thursday is expected to announce new measures to control the UK’s housing sector, which has been propelled by low-deposit lending schemes.

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