BoE Double Crosses Long Sterling Positions

It’s difficult to get excited about a forex market where trading ranges are either handcuffed by option-related deals or a market that is generally nonplussed by either volume or volatility interest. Thankfully, the World Cup is setting all type of scoring records; otherwise this would already be a ‘long’ summer. Nevertheless, capital markets are leaving it up to central bankers’ questionable messaging abilities to create opportunity. Again this morning, the Bank of England (BoE) Governor Mark Carney did not disappoint. To the Treasury Select Committee (TSC), he has taken an unexpectedly dovish approach on the timing of the U.K.’s first-rate hike.

Cable is on the move in the late European session, driven mostly by “dovish” comments from three Monetary Policy Committee (MPC) members (namely Carney, Charlie Bean, and David Miles) to the U.K.’s TSC. This squeeze to ‘long’ sterling positions (back down through £1.70) is managing to drag the EUR high on cross-related trade despite a weaker German business climate report issued this morning (109.7). Even the short end of the U.K.’s rate curve likes the comments from the BoE’s Carney and his fellow cohorts. Front months are up +2-3 ticks on the day in relief. The governor’s remarks are not coming from a hawkish perspective — similar to his Mansion House speech a few weeks ago that drove GBP a few pence higher. Back then, the market reacted swiftly to comments that an early rate hike was being underpriced. Comments this morning are certainly dovish, emphasizing the lack of inflationary pressures in the U.K. pipeline and repeating that the British Financial Policy Committee should address the rally in real estate. It seems to be Carney’s desire to ensure that longer-term rate expectations remain “anchored” in order to prevent too much GBP strength.

Rate-Hike Chatter Parked

The EUR/GBP cross is currently eyeing the resistance €0.8525 after shorts cover on dovish MPC comments. Members agree that wages developments increase spare capacity in U.K. labor markets, perhaps more than 1-1.5% of gross domestic product, which would create a sufficient margin of slack to keep consumer-price index pressure in check. Through this month’s high, the market will have to do battle with the next resistance points at €0.8550 and €0.8564. MPC members agree that any early stimulus exit risks forgoing British productivity improvements. Rate hikes can easily deal with a late stimulus exit that causes inflation — implying that the BoE is looking long rather than an earlier withdrawal of stimulus. Similar to other central banks, the uncertainty of tighter monetary policy points to benefits of moving slowly on rates. This is true for the Federal Reserve, BoE, Bank of Canada, and the Bank of Japan. Any rate change depends on the economy and remains data dependent.

Conflicts Sap German Business Confidence

Yesterday, soft French flash manufacturing and service reports had the EUR on the back foot. Today it’s German business confidence decreasing more than expected (109.7 versus 110.4) that is leaning on the single currency, amid concerns about the situations in Ukraine and Iraq. The assessment of current business conditions remained good; however, German companies are less optimistic about future business development. This would suggest potential weaker economic momentum ahead. The disappointing print would confirm the European Central Bank’s (ECB) stance to loosen monetary policy further — somehow vindicating its chief Mario Draghi and the ECB’s Governing Council from recent harsh criticism. Today’s report can be added to some other weak German data of late. Reports yesterday indicated that the German private sector slowed slightly this month, and last week, an indicator of financial market sentiment surprisingly declined for a sixth consecutive month. German second-quarter growth is expected to outpace the first quarter. The ECB’s targeted loans to banks and the cutting of its main interest rates cannot come soon enough — despite strong German wage growth supporting domestic consumption, Ukraine, a Chinese slowdown, and France on the ropes (Germany’s most important trading partner) could cause problems for Europe’s backbone. However, if Russia refrains from an “open” invasion, and the Iraq crisis on global crude prices remains contained, then the German export industry should fare better.

The EUR happened to drop momentarily after German Ifo expectations were disappointed. However, the single currency has been dragged higher again (€1.3623) due to some unfinished EUR/GBP business. Investors’ muted reaction speaks volumes about the state of the forex market — traders are disinterested in general releases and would rather wait for major news events to spring into action.

July 3 should be a ‘big’ impact day. The nonfarm payrolls (NFP) report will be issued a day earlier because of the U.S. holiday. It’s accompanied by Canada’s and the U.S.’s trade numbers and an ECB rate decision and press conference. Thrown into the mix will be a U.K. services purchasing managers’ index (PMI), U.S. jobless claims, and finished off with the U.S. Institute of Supply Management’s non-manufacturing PMI.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell