Sterling had traded heavily in anticipation of dovish comments by BOE Governor Carney. Prior to his speech, sterling slipped to its lowest level against the dollar since August 14. However, Carney did not break new ground or press very hard against the rise in UK rates or sterling since the start of the month. Even with sterling's underperformance in recent sessions, it is still the best performing major currency this month, gaining 2% against the dollar.
Carney did warn that if financial conditions tighten, which could derail the economic recovery, the central bank could take additional actions. At the same time, he indicated the BOE would reduce the liquid asset requirement for major banks and building societies once the 7% risk-weighted threshold is achieved, which would free up as much as GBP90 bln that ostensibly could be used for new lending.
The larger challenge for Carney and the Bank of England is that its forward guidance is not generally believed. Many observers and investors doubt that the BOE can keep this level of stimulus for the next three years, and hence the importance attached to the knockouts, or the conditionality of that forward guidance. Indeed, interpolating from the short-sterling futures strip, the market appears to suspect the first rate increase may take place by early 2015.
With a recent string of soft US economic data, coupled with a safe haven bid from the anticipation of a military strike against Syria, US 10-year yields have pulled back from the recent push above 2.90%. UK 10-year yields are rising sharply and poking through 2.80%, and are at new 2-year highs. This means that for the first time since May, UK 10-year yields are above similar Treasury yields, and by the most since March.
Sterling is drawing little support from this yield differential. Sterling did rally more than a cent on "sell the rumor, buy the fact" type of activity following Carney's remarks, but it ran into a wall of selling near $1.5550 and is reversing course. Sterling is back below the 20-day moving average (~$1.5505), a level it has not closed the North American session below since the start of the month.
The euro had spiked to test the GBP0.8650, but was quickly turned and has now fallen to a new session low. A break now of yesterday's low (~GBP0.8580), and especially a close below there, would amount to a potential key reversal. It would warn of a return to the recent lows near GBP0.8500, and potentially GBP0.8450.