Carney’s Reversal Lights Fire Under Sterling

Bank of England Governor Carney said shortly after the 5-3 vote at the MPC that now was not the time to increase interest rates.  Today sterling is flying.  It is posting the largest gain in two months and UK bonds selling off hard following Carney’s stunning reversal. Two-year Gilts are yielding 30 bp, the most since last June.  As recently as June 13, they were yielding less than 10 bp. 

It is not that central bankers cannot change their minds.  It is that Carney did so without warning and without fresh economic data. It has only been a week since the Mansion House speech where Carney leaned against the creeping hawkishness of some of the MPC.  This week another part of the BOE  announced an increase in the capital buffer, which also removes some accommodation provided after the referendum. 

Sterling is rising for the sixth consecutive session against the US dollar.  It dipped below $1.26 a week ago and moved today to challenge $1.30 (high so far ~$1.2970).  The euro is posting a key reversal lower against sterling.  It made a new high since last November earlier and now is below yesterday’s low.    A close below GBP0.8780 would confirm the reversal pattern.  The 20-day moving average is a little below there and a break would add to the negative technical tone. 

Carney indicated he would look at three factors to determine his rate stance:  extent that weaker consumption is offset by other parts of the economy, such as investment; wages and unit labor costs; and how the economy reacts to the Brexit.  While these sound important, it reveals very little about what will be decided in at the August 3 MPC meeting.  There may be a new print in high frequency data, but it will not change the picture very much.

In the sharp market reaction, the shift in SONIA suggest the first BOE hike has been brought forward to May 2018, in from August at the start of the week and early 2019 a week ago.  


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