We warned yesterday to watch out for a choppy day for the pound, not least because there was such a split of expectations on the timing of the next Bank Rate hike that there were bound to be analysts, investors and institutions forced to reassess their own forecasts. In his appearance before a House of Lords Select Committee last week, BoE Governor Carney had hinted that the Bank was preparing to upgrade the forecasts in its Inflation Report and this is exactly what happened; albeit the language was more aggressive than had been expected. GBP/USD surged more than 1½ cents from just below 1.39 to a high just over 1.4050. So far, so easy to explain…. Within the space of four hours, however, as the carnage continued in US asset markets, GBP/USD had reversed all its gains, coming back to its launching point with the precision of a Falcon-Heavy booster. GBP was still the best performer of the day although its 200+ pip gains against both the AUD and NZD were more than halved. This morning in London, GBP has given back early gains after the BoE Deputy Governor appeared to downplay the scale and impact of prospective interest rate hikes.
Speaking about stock market volatility, Dr Ben Broadbent said, “Equity markets go up and down, you have a correction of this size roughly every 18 months on average, so it’s not terrifically unusual....If you’re suggesting that this is somehow parallel to what happened in 2007, then I would say no. I think there are some very big differences and as I pointed out, the equity markets, particularly in the US, have risen a lot over the last 12 months and indeed, even today, we are roughly back where we were a couple of months ago”. On interest rates, he did not think a couple of interest rate hikes in the space of a year should come as a great shock, but added that the central bank had not fixed any path for tightening policy. Asked if he would distance himself from a media report that interest rates are likely to double from 0.5 percent by the end of 2018, Broadbent said: “I don’t know... We do not fix the path of interest rates in advance. What is fixed is our remit and rates change with the economy.”
As we approach the weekend, investor thoughts in the UK will likely turn away from interest rates and stock markets and back on to the in-fighting within the Government over its Brexit strategy, the status of Northern Ireland within a future customs union, and on the future leadership of Prime Minister Theresa May. The British Pound opens this morning in North America at USD1.3840, GBP/AUD1.7775 and GBP/CAD1.7450.