Week in FX Europe – Sterling Bulls Burned by Carney

The sterling bear got a license to roam after Governor Mark Carney at the Bank of England (BoE) delivered some dovish expectations in the most recent Quarterly Inflation Report released midweek.

The pound has hit a multiyear low and threatens to breakthrough £1.5650 with some conviction. It comes as no surprise to see investors shunning the sterling altogether after the BoE slashed growth and inflation forecasts in the QIR. The governor now expects the U.K. economy to grow +2.9% next year, weaker than the +3.1% that he and his fellow policymakers were predicting only three months ago. They also expect to see inflation dip below the psychological 1% handle within the next six months.

U.K. Rate Hike Unlikely for Now

Slashing growth forecasts has allowed fixed-income traders to dramatically trim their expectations for an interest rate hike. Previously, the market was gunning for a midyear hike in 2015. Now it has to fall in line with U.K. policymakers who forecast the first U.K rate rise to occur in the third quarter, 2015. At the moment, there is little incentive to want to own GBP, nevertheless, do not be surprised if the market does happen to see better levels to “short” the pound. The lack of market participation has a habit of achieving this, especially when close to any holiday period.

Political Uncertainty Weighs on Pound

Another source of uncertainty for GBP comes from political changes in the U.K. landscape. The rise in UKIP’s (U.K Independence Party) popularity would indicate a strong potential for a “hung” U.K. parliament after the next general election in May 2015. Prime Minister David Cameron is also under pressure. He has to deliver on a lot of promises to Scotland (incentives to stay within the U.K. fold during last September’s Scottish referendum). The timetable to present draft laws are due in January, followed by a rush job to get them into legislation. This type of process certainly does not favor well thought-out legislation.

What to Expect Next Week

Throughout this week, the market seemed to be rather content in taking some “long” USD profits off the table after the October U.S. headline payroll print missed expectations (+217k versus +223k). The U.S. dollar bulls continue to look for the catalyst to push the dollar to the next level. With time running out as we approach the holiday season, both dealers and investors may prefer to keep their powder dry until the New Year.

On Sunday, the Kiwis will get things underway with retail sales data; in pursuit will be Japanese trade numbers. Central bank speakers again will dominate the week, starting on Monday with the European Central Bank’s Mario Draghi, followed by the Reserve Bank of Australia’s (RBA) Governor Glenn Stevens and the RBA’s monetary policymakers’ meeting minutes. Tuesday, the Bank of Japan delivers its monetary policy statement and follows it up with a press conference.

The BoE’s and the Federal Open Market Committee’s meeting minutes dominate Wednesday. EUR flash manufacturing and inflation numbers occupy Thursday; while Friday rounds out the week with Draghi speaking at the 24th European Banking Congress, themed “Reshaping Europe,” in Frankfurt.

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