After a lengthy wait, is an interest rate rise from the Bank of England (BoE) going to arrive sooner than previously thought?
June has been a rollercoaster month for the BoE. First of all, Mark Carney’s Mansion House speech on June 12 implied that interest rates may be increased sooner than the markets were expecting.
However, in its latest minutes – released less than a week later – the consensus among the BoE’s Monetary Policy Committee was against such a move. The minutes stating that there was a low probability of interest rates rising this year.
Then Mark Carney spoke to the Treasury Select Committee, turning towards more dovish sentiments and announcing that rate rises will be gradual and dependent on data. The confusion from both politicians and the markets has been understandable, but many observers are predicting that interest rates will rise toward the end of the year.
Was does that mean for traders with a stake in pound sterling, or other global currencies? The legitimate concern raised by many about what effect an early rate rise could have on the British economy does not appear to being playing on the minds of forex traders. The markets have responded overwhelmingly positively to any hawkish behaviour from the Chairman of the BoE and negatively to any hint of dovishness.
Sterling rose over 1% against the dollar, yen, and euro from the opening of trading on the day of Mark Carney’s Mansion House speech to the end of the day after; alongside a strong performance across all the minor pairs. GBP/EUR leapt almost 87 pips, from 1.2409 to 1.2496, in two hours as the speech was delivered and reported on. Similar jumps can be seen across sterling’s currency pairs.
Likewise, drops against the yen, euro, Swiss franc, rand, Canadian dollar and Singaporean dollar made the day of the BoE minutes release a bad one for investors in sterling. Mark Carney’s grilling from the Treasury Select Committee (and subsequent dovish clarifications) have also resulted in drops for the pound across the majority of key global currencies.
It would appear then that keeping a close eye on signs that the BoE is ready to raise interest rates in the near future – both by scrutinising economic releases and any announcements from Mr Carney himself – could lead investors to pre-empt a sudden rise in the value of the pound.
It’s worth remembering, however, that announcements from the ECB of a policy very different from Mark Carney’s caused similar fillips for the euro; the markets crave strong governance more than any particular monetary policy.
By being the first major economy to move away from the low interest rates brought about by the recession, the UK economy is bound to become a major factor in policy, markets and currencies across the globe.
It’s a balancing act, though. Mark Carney won’t be keen to risk UK plc’s economic recovery; raise interest rates too far, too quickly and the change in consumer confidence, which has been positive but still fragile recently, could be quite dramatic. And, of course, a strong pound makes UK exports less competitive. Are you interested in the price movements of the UK pound? Learn forex trading with IG.
Mark Carney has stated that rate increases would be gradual and considered, to downplay any possible negative consequences. After being compared to an ‘unreliable boyfriend’ by the Treasury Select Committee, though, taking BoE announcements with a pinch of salt is probably a good policy for any investor.
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