Sterling gains after Carney speech

Tom Tong13/Feb/2014Currency Updates

GBP

A glorious day for the pound yesterday as it scalped huge gains against other worldwide currencies. It jumped 1.25% against the euro, touching yearly highs by late afternoon. The pound also took a per cent off the dollar, scratching at those 2 yearly highs seen in the middle of January.

The pace at which sterling steamrolled its currency pairs can be attributed mainly to Mark Carney and his lunchtime speech, although poor data from the US and eurozone only added fuel to the fire. Markets enjoyed the upbeat mood of the Governor, and appreciated the transparency in predictions from the BoE.

The Bank of England governor essentially scrapped his ‘forward guidance’ plan, stating that the Bank would not be tied to any single economic indicator in their decision on interest rates, rather look at a range of data. The aim of the bank will be to raise interest rates gradually to 2% between 2015 and 2017, depending on the UK’s fortunes up until then. It was much a reflection of Janet Yellen’s speech on Tuesday, remaining dovish while ditching any specific thresholds.

The Bank also upgraded UK growth forecasts, predicting growth of 3.4%, up from 2.8% previously stated. Carney’s dovish mood was emphasized as he stated that inflation is not believed to be a concern, due to spare capacity in the economy of 1-1.5%.

Today is a quieter affair for the UK, with only a 30 year bond auction to spark any interest.

EUR

The euro suffered again yesterday, with heavy losses coming from all sides. This time the single currency has only itself to blame, with upgraded German growth forecasts unable to cover for poor industrial production figures. EU wide production fell by 0.7% in December, a 0.4% bigger contraction than in November. The year on year figure dropped 1.3% to just 0.5, a relatively miserable reading.

The unfortunate reality for those European countries who are making ground in recovery is that, in a single market, you are only as strong as your weakest member. While the likes of Germany, Ireland and to a lesser extent Italy and France, periphery nations’ long term struggles are weighing down the currency they all share.

Mario Draghi steered clear of discussing interest rates and inflation in his speech, focusing instead on much grander subject matter, including increased financial integration within the eurozone over the long term.

German inflation figures out today are expected to stick at 1.2%, otherwise nothing of note to look forward to.

USD

The greenback must have felt a sense of déjà vu yesterday as followed a remarkably similar pattern to Tuesday. Smooth gains against the euro were countered again by large swings to the downside against the pound.

Mortgage applications for early January fell 2%, a disappointing reading. The US powers that be will be getting a tad itchy about the increasing frequency of poor data releases, especially with headline figures such as Non-Farm Payroll falling way under par. With inflation also under pressure they are relying more and more on strong growth figures to keep the picture rosy.

Today sees Janet Yellen’s second speech of the week, although nothing new is expected to come out, with her expected to reiterate her points from Tuesday. We also have retail sales for January, with the market calling for a flat reading of 0%, as well as initial and ongoing jobless reports.

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Written by Tom Tong

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