Many factors affect currency values, including geopolitics, growth and other economic data, mergers and acquisitions, politics, and central bank reserves. But none is more important and powerful as interest rate differentials. And with those magic words, Carney has set the trade.
“It is likely that pound strength will prove more persistent now with the BoE highly likely to become the first major central bank to begin raising rates later this year,” wrote currency strategist Lee Hardman of Bank of Tokyo Mitsubishi
Put simply: “In the short run, U.K. data is better and Carney sounds more willing to raise rates early than (Federal Reserve Chair) Janet Yellen. There isn’t much point fighting the move,” said Kit Juckes of Societe Generale.
Before Carney’s speech, the market was pricing in a hike in interest rates from the Bank of England next May; after the speech, that moved up to January. And some are talking about as soon as this year.