Ben Ridgeway Ben Ridgeway
Client Trading Services Manager / Sales Trader, Saxo Capital Markets
18 August 2014

Carney indecision leads sterling astray

Minutes from the Bank of England's latest Monetary Policy Committee meeting out on Wednesday may reveal whether a rate hike is on the cards this year.

  • Cable drops to six-week low after dovish Inflation Report
  • Carney quells rumours of informal pact with UK Chancellor
  • Split MPC expected in upcoming BOE minutes​​

GBP/USD has suffered for the sixth week in a row, dropping from above the 1.6800 level to a low of 1.6663 on August 14th. The Bank of England’s (BoE) Inflation Report released on Wednesday August 13th, followed by a speech from BoE Governor Mark Carney, dealt this severe blow to Cable. The wage growth forecast was revised from 2.5 percent to 1.25 percent, thus below the current inflation level of 1.9%. 

This may be viewed as a double whammy hitting ​the UK economy, where living costs seem set to rise and members of the public are earning less. Even if the consumer price index released for the UK comes in at 1.8 percent this week, down from the previous reading of 1.9 percent, this situation will still stand. Carney also highlighted the importance of a weaker sterling with regard to the need to increase exports.


Despite the recent fall in unemployment and low levels of inflation reported in the UK this year, wage growth remains stubbornly low.


The situation now appears far different. At the time of Carney’s speech at Mansion House on June 12th, GBP/USD was rising on close to 1.7000 and broke through that level shortly afterwards. The speech gave the firmest indication that interest rates would rise sooner than many investors expected and there was a positive reaction in markets. Many were now certain that a rise in rates to 0.5 percent would now occur before the end of the year. 

Carney spoke of the need for markets to react to what had been a very decent run of good UK data. He also quelled suggestions of an informal pact between the BoE and the Chancellor of the Exchequer’s office to maintain rates at their low levels until after the general election in May 2015.

Any dissenters?

There seems to be a divergence of opinions within the BoE’s Monetary Policy Committee regarding the timing of this base interest rate hike, and this may be revealed when the minutes from the latest meeting are released on Wednesday morning. Previously, there was a stance linking a rise in this rate to the unemployment rate. 

Now it seems that wage growth is a far more influential factor. As the market backtracked on its previous view last week, Carney sought to resurrect this view in an interview featured in The Sunday Times published over the weekend. He mentioned that wage growth need not be above inflation, but a strong view from the BoE that this measure was stable and rising would be enough to result in an interest rate hike. 

GBP/USD rose from the open on Monday morning as a result, but this uncertainty is ultimately not helping sterling. One must be reminded that the UK economy still seems strong, with the central bank forecasting gross domestic product of 3.5 percent this year. Despite this, and with the added geopolitical tensions from the Middle East and Eastern Europe also weighing on sterling, it is clear that the average citizen may begin to find their wallets and purses lighter. 

What this means for traders

Chances of a rate hike have therefore receded considerably since Carney’s speech at Mansion House. What has become evident since that speech, is that there may well be discrepancies evident within the BoE. Indecision and confusion are seemingly clear, and the BoE will need to maintain a firmer and more assured stance if it intends to retain credibility and ensure that GBP/USD continues in its steadiness. 

How will sterling trade against the US dollar? Trade GBPUSD as spot, forward and as an option today.

 

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