Will BoE Dissenters Change Sterling’s Direction?

Currently, the central banker remains at the core for most forex moves. Governor Glenn Stevens at the Reserve Bank of Australia (RBA) is trying hard to jawbone the Aussie dollar lower. While the “policy chameleon” — Governor Mark Carney at the Bank of England (BoE) — confused investors with hawkish remarks last weekend, following dovish comments delivered the week before. Carney’s silver tongue is complicating the pound’s direction this week. The sterling picture is further muddied by two of the nine Monetary Policy Committee (MPC) members who voted to increase interest rates at the MPC’s August meeting. If nothing else, policymakers are certainly providing investors with price movement opportunities.

Even stateside, the investor is looking to the policymaker for guidance. The Federal Open Market Committee (FOMC) will release the minutes from its last meeting this afternoon. Expect the market to downplay the event; instead dealers prefer to look to the annual two-day symposium on monetary policy in Jackson Hole, Wyo., that kicks off on Thursday. The FOMC minutes will reveal what was discussed a few weeks ago, while Jackson Hole will hopefully give the market some clues on any future Federal Reserve policy shifts.

BoE Discord Emerges

It was revealed this morning that two MPC officials pushed for an immediate interest rate rise in August. The MPC minutes indicated that Martin Weale and Ian McCafferty voted to increase the BoE’s benchmark to +0.75% from its historic low of +0.5%. Their actions officially mark for the first time dissent within Carney’s ranks. The possibility of rate divergence among the majors will increase market interest in sterling. Today’s reports will both heighten and fuel speculation that the BoE might raise rates sooner-than-expected. Already the market is pricing in a rate hike in the first quarter of 2015, a week after Carney poured cold water on an earlier November hike by focusing on wage and labor spare capacity. Nonetheless, will investors now revert to their earlier prediction of a BoE rate hike by year-end?

The news of the dissent has only been able to give GBP/USD a modest boost (£1.6650) because the aforementioned dissenters are well-known hawks. Both will find it difficult to sway the rest of Carney’s rate-setters. If anything, sterling’s strength has also been hampered by the U.S. dollar’s move higher across the board. Carney and his rate-voting followers will hold on to the fact that there is insufficient U.K. inflationary pressure from anemic wage growth to justify an immediate rate hike. If the market does buy into this theory then the pound should continue to follow along its bearish trend a little while longer.

Stevens Catches a Second Wind

Down Under, the RBA governor continues to talk a good game in an effort to push Australia’s currency lower. Stevens takes every opportunity to talk the Australian dollar down despite mixed fundamental messages swirling about. Overnight, he mentioned the possibility of central bank intervention to weaken the AUD ($0.9290), and that the chance of a “significant drop in the Aussie dollar’s value remains underappreciated.” He says an expensive AUD is hurting Aussie exports, especially manufacturing. The RBA has the option to use direct intervention, it’s an option that is on the table, and it needs to be telegraphed in advance to the financial community to improve its effectiveness.

Central bank low-rate policies have benefitted the AUD, making it the go-to carry trade of choice, mostly financed with investors borrowing in EURs and buying the higher-yielding AUD. Nevertheless, the moment that the Fed indicates a change in its monetary policy, these long AUD/carry positions should come under severe pressure, mostly because it’s a very crowded trade. The AUD continues to trade well north of the psychological $0.9000 level despite sharp falls in key commodity prices, and the RBA cutting its estimates for growth and inflation. Obviously, most of the Aussie dollar’s strength has come from foreign capital flows. Australia issues approximately AUD$55B new debt each month, and with foreign investors’ strong demand for yield, it will continue to support the AUD on pullbacks.

The ‘real’ AUD direction is being fought by rate differentials. There is only so much policy talk that can weaken the currency. Stevens knows a weaker AUD requires a change in monetary policy to have a greater impact.

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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