BoE Double Crosses Long Sterling Positions

by: Dean Popplewell

By Dean Popplewell

It's difficult to get excited about a forex market whose ranges are either handcuffed by optioned related deals or a market that is generally non-fussed by either volume or volatility interest. Thankfully the World Cup is setting all type of scoring records; otherwise this would already be a "long" summer. Nevertheless, capital markets are leaving it up to central bankers' questionable messaging abilities to create market opportunity. Again this morning, the BoE's Mark Carney does not disappoint. To the Treasury Select Committee, he has taken an unexpectedly dovish approach on the timing of the UK's first-rate hike.

Cable is on the move in the late European session, driven mostly by "dovish" comments from three MPC members (Carney, Bean and Miles) to the UK's TSC. This squeeze to "long" sterling positions (back down through £1.70) is managing to drag the EUR high on cross-related trade despite a weaker German business climate report this morning (109.7). Even the short end of the UK's rate curve likes the comments from the BoE's Carney and his fellow cohorts. Front months are up +2-3 ticks on the day in relief. The governor's comments are not coming across from a more hawkish perspective - similar to Carney's Mansion House speech a few weeks ago that drove GBP a few pence higher. Back then the market reacted swiftly to comments that an early rate hike was being underpriced. Comments this morning are certainly dovish, emphasizing the lack of inflationary pressures in the UK pipeline and repeating that the Financial Policy Committee should address the rally in real estate. It seems to be Carney's desire to ensure that longer-term rate expectations remain "anchored" and a wish to prevent too much further GBP strength.

The EUR/GBP cross is currently eying the resistance €0.8525 after shorts cover on dovish MPC comments. Members agree that wages developments insinuate more spare capacity in UK labor markets, perhaps more that 1-1.5% of GDP range, which would create a sufficient margin of slack to keep CPI pressure in check. Through this month's high, the market will have to do battle with the next resistance points at €0.8550 and €0.8564. MPC members agree that any early stimulus exit risks forgoing UK productivity improvement. Rate hike can easily deal with a late stimulus exit that causes inflation - implying that the BoE is looking at later rather than earlier withdrawal of stimulus. Similar to other central bankers, the uncertainty of tighter monetary policy points to benefits of moving slowly on rates. This is true for the Fed, BoE, BoC and BoJ. Any rate change depends on the economy and remains data dependent.

Yesterday was softer French flash manufacturing and service reports that had the EUR on the back foot. Today it's the German business confidence decreasing more than expected this month (109.7 vs. 110.4), amid concerns about the impact of crisis both in the Ukraine and Iraq. The assessment of current business conditions remained good; however, German companies are less optimistic about future business development. This would suggest potential weaker economic momentum ahead. The disappointing print would confirm the ECB's stance to loosen monetary policy further - somehow vindicating Draghi and company from recent harsh criticism. Today's report can be added to some other weak German data of late. Reports yesterday indicated that the German private sector slowed slightly this month and last week, an indicator of financial market sentiment surprisingly declined for a sixth consecutive month. German Q2 growth is expected to outpace Q1. The ECB's targeted loans to banks and cutting of its main interest rates cannot come soon enough - despite strong German wage growth supporting domestic consumption, Ukraine, a Chinese slowdown and France on the ropes (Germany's most important trading partner) could cause problems to Europe's backbone. However, if Russia refrains from an "open" invasion and Iraq crisis on global crude prices remains contained then the German export industry should fare better.

The EUR happened to drop momentarily after the Ifo expectations headline drop. However, the single currency has been dragged higher again (€1.3623) due to some unfinished EUR/GBP business. The market's outright muted reaction speaks volumes about the state of the forex market - traders are disinterested in general releases and would rather wait for major news events to spark a "truer" market reaction.

July 3rd should be a "big" impact day. NFP is reported a day earlier due to the US holiday. It's accompanied by Canada and US trade numbers and an ECB rate decision followed by a press conference. Thrown into the mix will be UK services PMI, US claims and finishes off with the US ISM non-manufacturing PMI - wow, and there are no World Cup games scheduled that day!

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