Sterling Rallies As BoE Governor Changes Stance

Arguably, the biggest event of Thursday’s evening was the beginning of the World Cup in Brazil, where the host country’s team beat Croatia by 3-1. However, in the financial world, major news came from the U.K. and more specifically the Bank of England. It appears that there is a change of view by the BoE after the Bank’s Governor Mark Carney reported that there might be an increase of the benchmark interest rate earlier than some expectations. Carney’s comments lifted the sterling higher against the U.S. dollar to over 1.69, at the same time that Pitbull and JLo were performing before Brazil’s first match.

BoE’s new stance wasn’t actually the change of trend to the upside for the cable, because on the previous day (last Wednesday) there was an increase of the GBP/USD after some encouraging unemployment data in the U.K. The ILO unemployment rate, released by the National Statistics office, for the three months to April declined to 6.6% compared to 6.8% for the previous period. April’s ILO rate was the lowest since 2009, and surprised analysts who were expecting a decrease to only 6.7%. The number of employed people for the same period increased by 345,000, while the number of jobless claims for May decreased by 27,400. The unemployment rate’s fall was viewed as a sign of further economic recovery in the U.K. and the pound on Wednesday gained about 0.2% against the U.S. dollar.

The most significant news for the cable came on Thursday evening during Mark Carney’s speech at London’s Mansion House, when he gave hints that there might be an earlier-than-expected interest rate increase. Included in his speech, he added that the eventual increase of interest rates would be ‘gradual and limited’. There were comments on high prices within the housing market and also increasing mortgage debt, which were used by Carney as reasons for BoE to consider an early interest rate increase. However, there were concerns by the British policymakers regarding a potential housing bubble, and Business minister Vince Cable suggested that the BoE might want to limit excess mortgage lending in cases of large loan/income ratios. Moreover, Finance minister George Osborne said that the government should give additional freedom to the BoE to restrain that type of mortgage lending because, even though the housing market is not currently destabilising economic stability, it might well do so in the future.

The BoE Governor’s tone changed considerably following Thursday’s speech, as he was mostly and traditionally trying to persuade the markets that the Bank would stick to the current interest rates for as long as it was needed. On that day, the EUR/GBP fell below the psychological 0.8 rate, whereas the GBP/USD increased sharply both on Thursday and Friday, and it is currently flirting with the 1.7 level. Will it make it through?

By David Parker,

www.easy-forex.com