BoE’s Chief Economist Andy Haldane in a speech last evening commented on the possibility of a rate cut from the BoE. Although he stressed that the comments were that of his own, the markets sold off the British Sterling given that the BoE’s MPC members were largely unsure of the next policy move.
With inflation refusing to budge any higher the BoE members embarked on a verbal “talk down” for the British Sterling. It was only last week that BoE Governor Mark Carney commented that an appreciating Pound would only help in putting more downward pressure on inflation. The British Sterling, since then has started its downtrend, reversing from the highs of 1.55. The GBP got a boost from yesterday’s FOMC meeting but eventually gave up its gains and gathered momentum from Haldane’s comments.
In our previous long-term analysis of the GBP crosses and especially the Cable (GBPUSD), our view was that the BoE would refrain from making any major policy decisions until the UK general elections are held, which is due in May. This includes both a rate cut and a rate hike as well. In the interim, the BoE members are left with their verbal interventions to monitor their monetary policies. In this aspect, we could potentially expect to see more such market events that could keep the volatility alive in the GBP crosses.
On the comments, the British Sterling saw a wide selloff weakening across the board and falling against commodity risk currencies such as the Canadian, Australian and Kiwi Dollars.
Since BoE’s Carney comments followed by the latest remarks from Andy Haldane, the British Sterling declined -1.37% against the US Dollar and -1.8% against the Yen. The Euro on the other hand gained as much as 2%.
Recent fundamentals also failed to support the Pound with the latest jobs report showing a softer than expected growth as the unemployment rate stalled at 5.7% with average earnings showing a decline as well.
In the coming months, the Pound is likely to remain subdued and any attempts to rally, especially against the Greenback is likely to see comments from BoE officials talking down the Pound at least until the political landscape is cleared in May.
The Pound, as we know is quite susceptible to political risks as we saw a glimpse of this during the Scottish referendum last year, where the Pound saw a dramatic fall after reaching the highs of 1.7 against the US Dollar.
For the short term, the driving factor for the Pound will obviously be the data from the US as the latest FOMC meeting revealed that the Federal Reserve could possibly start hiking rates as early as June or September. Continued diverging monetary policies could keep downward pressure on the British Pound until the risks of the election are dealt with while the markets keep an eye on the inflationary pressures from Crude oil prices.
