Pound slides as Carney casts doubt on May hike

It’s been quite a week for the pound with the currency experiencing a fairly sharp drop after hitting its highest level against the US dollar since June 24th 2016 - the night after the Brexit vote - on Monday. The depreciation in sterling has supported the FTSE with the benchmark higher once more today and on course for its highest weekly close since January.    

BoE now expected to stand pat in May

Several data points over the last week have weighed on the pound with a trio of bad news coming from the average earnings, CPI and retail sales numbers, but it was comments from BoE Governor Carney last night that appear to have shifted market expectations. At the start of the week there was as high as an 80% probability that the BoE would hike next month, but according to derivatives markets the likelihood has slipped dramatically meaning that it is now odds-on that the bank keep rates unchanged at their May meeting. The fairly rapid repricing of market expectations has come in the last 24 hours with the unsupportive economic data seemingly dismissed by the majority who kept faith that the Old Lady of Threadneedle Street would push on regardless, before Carney’s intervention in the form of an interview with the BBC broadcast yesterday evening.

Cautious Carney cools cable

The GBPUSD is set for its biggest weekly loss in 8 as the pair has reversed and engulfed the prior week’s trading range in its entirety. The pair is now back around the 1.40 handle with Carney’s remarks that rate rises were “likely” in the coming years and that softer economic data was giving the BoE some food for thought pouring cold water on hawks and casting doubt over a May hike. The increase in November was the first hike in over a decade and was effectively a decision to reverse the cut to all-time lows in August 2016 following the shock outcome of the Brexit vote. Given the weakness in macro data and ongoing Brexit uncertainty it is hardly surprising that Carney seems to be adopting a cautious approach, and the market appears to have gotten a little ahead of itself in thinking that we are about to embark on a sustained hiking cycle. Viewed from this perspective it shouldn’t really be too much of a surprise as inflation appears to be moving back lower and with the relative strength seen in the pound over the last 9-12 months (the lag that the BoE approximate that currency strength impacts inflation) it is quite likely we get further declines in price pressures going forward, even without further policy tightening from the BoE.