Markets generally take central banker’s at their word, so the change in tone from Governor Mark Carney from his previous market comments has rocked sterling, pushing it more than 100 pips lower versus USD, and decisively through the 0.90 barrier in EUR/GBP.
The Bank of England’s ‘Super Thursday’ has sometimes failed to live up to its billing but today saw sharp moves in markets after the initial 6-2 vote disappointed some who expected Haldane to switch firmly to the hawkish side of the vote. While inflation forecasts pretty much stayed unchanged, softer growth numbers, especially for this year (from 1.9% to 1.7%) pushed sterling lower.
However, it was the press conference that really put the boot into sterling as the markets completely ignored Carney’s attempts to insist that they were underestimating the possibility of rate hikes, which may be needed over the coming years if the Bank’s forecasts prove correct.
More importantly, the market has questioned Governor Carney’s change of stance from his comments in June when he insisted that "some removal of monetary stimulus is likely to become necessary." One must also remember that this came on the back of him saying only a week before that "now is not the time to begin raising interest rates." Of course, UK domestic data has come in softer since that time but the lack of any hawkish tone has now pushed back the market pricing of the first hike from August next year until November.
What's Next?
Where GBP/USD goes from here is what interests us. The pair hit highs earlier this morning not seen since September of last year around 1.3266. Prices had previously formed a series of higher swing lows and most recently have been trading in a tight range. The loss of support of the lower point of this range around 1.3195/00 now acts as strong resistance to any new up-leg. Cable is now at short-term trend support at 1.3125, which means if we close below here then the ascending trendline from June lows will have been broken. This potentially bearish outside day will add to the down pressure on cable.
That said, any push off this strong trendline will mean prices can retrace some of today’s losses and push higher once again. No doubt, Friday's US employment figures will tell us if this is the case or not.