Summary:
- GBP comes under pressure during Carney press conference
- Carney: "Policy needs to walk, not run"
- Pound had earlier gained on rate hike
There’s been a pretty telling reaction to the decision from the Bank of England to hike interest rates for only the second time in a decade, with the pound failing to rise despite plenty of ammunition that could have sparked a move higher. Even though the 0.25% increase was widely expected the MPC delivered a more hawkish than expected message, with a unanimous 9-0 voting pattern, upwards revisions to the growth forecasts and a R* that was towards the upper bounds of that expected in being 2.0-3.0%.
The initial reaction saw a pop higher in sterling but the gains were erased before being reversed during Carney’s press conference. There wasn’t a standout remark that caused the drop, with it appearing to be more a case of a gradual realisation that the bank remains unlikely to embark on a sustained hiking cycle in the current environment. Selected comments are as follows:
- Some signs business investment is softening due to Brexit
- Risk premia on sterling assets have increased somewhat in recent weeks
- Brexit talks now entering a critical period
- Policy needs to walk, not run, to stand still as equilibrium interest rate rises gradually
The last line here is probably the most telling and neatly encapsulates the overall tone of the press conference. The pound is now falling against all its major peers after earlier gaining against them, with the biggest declines seen in the GBPJPY and GBPUSD.
The initial positive reaction in the pound has subsided and the currency now trades lower against all its major peers. Source: xStation
Looking at the GBPJPY more closely the market is coming under pressure on longer time frames once more. Price remains between the 23.6% and 38.2% fibs at 148.65 and 143.76 respectively. Dips towards 143.76 have been bought in recent months and it could be key to see how the market reacts if price moves back lower in the coming sessions. A failure to find sufficient buying support could pave the way for a larger decline.
GBPJPY is drifting lower and could be set to retest the prior lows around 143.76. Source: xStation
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