The British pound got a bit carried away to the upside, riding higher against the USD as the latter is in a free-fall, ignoring some hawkish words and suffering weak data.
However, there are also some risks to the strength of the pound, most notably the Brexit risk. And BOE Governor Mark Carney did hit the pound, trying to mix the Brexit risk with other warnings as well. But when he says that the impacts of Brexit would be “unhelpful”, it’s quite obvious what he thinks.
GBP/USD reacted with a drop from the sky highs of 1.4418 to 1.4382. Cable is still over 100 pips on the day, but looking a bit dizzy at these levels.
Carney said that the Bank of England could cut interest rates closer to 0% if needed, but currently does not see the need to set a negative interest rate and also said he doesn’t believe in helicopter money. The mere mention of these options means it’s not totally off the table.
The governor did try to stay away from making any clear political statement, saying that the BOE will not make an overall assessment of EUR membership. However, more or less in the same breath, he already warned that “some elements of risk related to the referendum are beginning to materialize”. An exit would make funding the current account deficit more expensive. He adds that the City of London could lose some of its financial weight following an exit. He also added that there’s extensive evidence that the UK did retain flexible product and labor markets whilst in the EU.
Is he saying the European Union is not that bad? One can read it this way. This is probably as political as it gets.
To add something else to the mix, he adds that China poses a bigger risk than a Brexit. China is also the Fed ´s favorite punching sack and always gets the blame despite taking the reigns of economic growth after 2008.
In addition, he added that a Brexit vote will result in an extended period of uncertainty, which is a bit more obvious. However, the word “uncertainty” also implies “trouble”.
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