Sterling Off as Carney Plays Down Rate Hike Chances

It’s shaping up to be another rather quiet session on Tuesday, with US futures pointing marginally higher and the economic calendar very light on notable releases.

The focus remains broadly on the UK, which began negotiations with the EU on its exit on Tuesday, while we’ve also heard from Chancellor Philip Hammond this morning as well as Bank of England Governor Mark Carney, both of whom spoke at the delayed Mansion House dinner in London.

Sterling is coming under pressure again on Tuesday after BoE Governor Mark Carney defended the need to resist raising interest rates, despite three policy makers voting to do so at the meeting last week. Rising inflation is clearly a concern among certain policy makers, having risen to 2.9% last month which is well above the central banks 2% target, but Carney was keen to stress that other factors have to be considered.

Prior to last week’s meeting, markets had not anticipated a rate hike until at least 2019, prompting the pound to rally after the announcement. While the move was quite sharp, it hasn’t developed into anything more which would suggest investors are very much on the same page as Carney who argued that against the backdrop of anaemic wage growth and mixed consumer activity and business investment, it would not be appropriate to raise rates. This may mean tolerating higher inflation in the short term but under the circumstances, I think this remains the most suitable and likely response.

With Brexit negotiations now officially underway, it will be interesting to see whether sterling remains as vulnerable to the constant flow of updates and commentary, especially given the friendlier tone that both sides adopted on day one. Perhaps all the fighting talk of the last year was just simply both sides positioning themselves ahead of difficult negotiations and now they’ve actually started, things may become a little quieter on that front. Still, it’s very early days and should the talks turn nasty, I wouldn’t be surprised to see both use the media to vent their frustrations which could be bad for the pound at times.

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