Carney Pushes Back, Sends Sterling Reeling

|
 |  Includes: FXB
by: Marc Chandler

The Bank of England Governor refused to consider an early rate hike given that the unemployment rate is nearing the 7% threshold it had previously provided. At a CBI lunch in Davos, Carney has indicated the recovery needed to strengthen and there was "some way to run" before he would sanction higher rates.

This dovish push back against market expectations has sent sterling broadly lower and has inflicted much damage to the near-term outlook for sterling. Sterling initially rose to new two-year highs against the dollar in Asia and now has sold off through yesterday's lows. A close below those lows (~$1.6557) would constitute a key reversal.

Similar price action was seen on Jan 2 and from the low set that day, sterling declined another cent over the next two weeks before finding a base. In fact, it was off that base near $1.6300 that sterling spring boarded to new highs.

A move of a similar magnitude now would suggest a move toward $1.6400, roughly this week's lows seen Monday and Tuesday. The 50% retracement of the gains from last Friday is found near $1.6490, just below today's low, which appears to be offering some support.

Carney has indicated that the BOE would update its forward guidance policy at next month's quarterly inflation report, scheduled for February 12. He has already indicated that it is not just the unemployment rate, but that the BOE will look at overall conditions of the labor market. This suggests he is unlikely to simply lower that threshold as some have suggested. Carney provides a list of "headwinds" that include the disappointing productivity growth and the decline in real wages. Some 750,000 few people are working than before the crisis.

In fairness, Carney has long maintained that thresholds are not triggers. It did its function and now the forward guidance, which we suggest is a communication policy not monetary policy, needs to be adjusted as the threshold has been approached. While we have cast a jaundiced eye toward the hype about forward guidance, we think the claims that the BOE is abandoning it, or that it has been a failure, is a gross exaggeration.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.