Pound tumbles as Carney warns against interest rate hikes

Bank of England (BoE) Governor Mark Carney sent the pound tumbling yesterday with his pessimistic assessment of the need for higher interest rates.

The pound has stared the morning on the decline versus its peers. GBP/EUR is trending down at €1.1327, while GBP/USD has dipped to US$1.2607. GBP/AUD is holding just below opening levels at AU$1.6675, while GBP/NZD has edged down to NZ$1.7432. GBP/CAD has slipped to CA$1.6738.

Keep reading to see why today’s government borrowing figures will be particularly interesting…

What’s been happening?

It was another busy day for the pound yesterday, with sterling tumbling against its peers after a pessimistic speech from BoE Governor Mark Carney. The chief policymaker suggested that it was not an appropriate time to raise interest rates, even though inflation has reached 2.9% and the Monetary Policy Committee (MPC) was split at its latest meeting.

Further adding to the pound’s woes were comments from credit ratings agency Standard & Poor’s Sovereign Ratings Chief Moritz Kraemer, who said that they wouldn’t necessarily wait until the end of Brexit negotiations before changing the UK’s credit rating. The UK currently holds an AA rating with S&P, having been slashed from the prized Triple A after the Brexit referendum.

Markets had hoped ratings agencies would wait until the outcome of the exit talks was known before reassessing the UK economy, but Kraemer said S&P will continue to evaluate every six months.

The euro was on largely mixed form, but the pound sell-off kept GBP/EUR firmly on the decline. Data showed the Eurozone current account balance surplus had fallen sharply, but leading German think tank Ifo predicted that the nation would see GDP growth of 2% in 2018.

GBP/USD remained on the decline yesterday, although the US dollar had something of a weak start to the day. The latest speeches from Federal Reserve officials were less optimistic than that of Dudley Williams at the beginning of the week. Late on Monday night, Charles Evans claimed the Fed should perhaps wait until the end of the year before deciding whether to raise interest rates again. Meanwhile, Eric Rosengren seemed to suggest yesterday that markets needed to get used to the idea that interest rates would remain low for some time.

What's coming up?

Having made significant losses yesterday, the pound may find itself rebounding again today. How sterling reacts to the latest data will tell us a lot about whether or not the markets believe suggestions the government is planning to abandon austerity measures. Government borrowing figures could improve pound appetite - the deficit is predicted to shrink by around £2 billion - but if markets expect government spending to skyrocket anyway once cutbacks are abandoned, the pound may not be much moved as the data will be moot.

A speech from Monetary Policy Committee (MPC) member Andy Haldane at 21.00 is too late in the evening for markets in London to react, but there could be a delayed response on Thursday morning. Haldane is traditionally very cautious about monetary policy, so is likely to state that interest rates need to remain low.

There is no data due from the Eurozone tomorrow and little from the US of any importance. GBP/EUR and GBP/USD are therefore likely to be driven mostly by domestic issues.

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Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.