BOE Governor Mark Carney certainly made his mark, once again: in a speech in Mansion House, the Canadian said the UK rates may rise sooner than the markets expects. This is more than a subtle hint: a clear statement regarding higher rate hike expectations from the straight from the mouth of the horse cannot be left unnoticed in currency markets.
The British pound rallied across the board. GBP/USD jumped from around 1.6835 to 1.6915 in the initial move, some 80 pips, but did not stop there. Cable continued higher and already reached 1.6971. Can it break 1.70 today?
Here is how it looks on the chart:
A rate hike for Q2 2015 was what markets had expected. In the recent inflation report, the Bank acknowledged that market expectations for a hike at this timing were more or less in line with the BOE’s expectations.
However, the ongoing strength in the UK economy certainly pushed some to think that a rate hike could come even in 2014. Carney’s speech undoubtedly brings expectations forward.
The unemployment rate dropped to 6.6% in April and inflation stopped falling, as of April. We will get fresh employment data next week. More importantly, the MPC Meeting Minutes could show that one or two members of the MPC already voted for a rate hike in June. This cannot be ruled out.
Carney spoke in a pre-scheduled speech, but the timing may have caught some by surprise: the world was preparing for the opening match in the World Cup, in which Brazil beat Croatia 3:1. Nevertheless, the markets moved.
Carney’s carnage was not limited to cable: EUR/GBP made a big move downwards and finally broke below the round number of 0.80. England plays against Italy, a euro-zone member, on Saturday. At least in currency markets, the UK enters the game with some back wind.
This is a classic move in currency markets: expectations from central banks change and currencies react strongly. We have seen this earlier in the week with the rate hike from New Zealand: not only did the RBNZ raise the rates, but also left the door open for another hike in the near future. The market didn’t expect it and NZD rallied.
Hopefully we will have more high impact events soon.
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