The British Pound is under pressure in mid-week trade with foreign exchange markets digesting a speech by Bank of England Governor Mark Carney that prompted markets to rapidly raise expectations for an interest rate cut over coming months.
Carney spoke in Bournemouth late on Tuesday that the “stance of monetary policy is tighter than intended” owing to a disconnect between market expectations of interest rates and the Bank of England’s guidance on where they believe interest rate expectations should actually lie.
Carney’s added that downside risks to the economy have increased recently owing to global trade tensions and markets interpreted the comments as reason to increase expectations for an interest rate cut in coming months.
Currencies tend to fall when their central bank communicates the prospect of future interest rate cuts.
Carney said the global trade tensions have caused a “sea change” in investors’ outlook for the world economy that “suggests a shock to U.S. and Chinese business confidence and investment analogous to what has happened in the UK”.
“The latest actions raise the possibility that trade tensions could be far more pervasive, persistent and damaging than previously expected. The rationales for action are broadening,” he said in the speech.
The key phrase here being “the rationales for action are broadening”: markets quickly ramped up expectations for an interest rate cut at the bank on this comment. Money markets now assign a 57% probability of a 0.25% interest rate cut by the Bank in December, up from 41% ahead of Carney’s speech.
This repricing in expectations sent Sterling lower.
The intervention by the Governor means what had already been a poor day for Sterling just got worse leaving the currency trading near multi-week lows against the Dollar and Euro at the mid-week period.
“Things have gone from bad to worse for the Pound. After being knocked by a poor construction PMI earlier in the day, sterling slumped to hit a new session low moments ago in reaction to a speech by Bank of England Governor Mark Carney,” says Fawad Razaqzada, a Market Analyst with Forex.com. “Carney said the BoE expects economic growth in the second half of the year to be considerably weaker and that it will re-assess Brexit and trade tension in August.”
The speech appears to be a clear move by the Bank of England Governor to massage market expectations towards expecting a more sombre assessment at their next major policy update in August with the view to potentially laying the path to another interest rate cut.