Sterling falters as BoE’s Carney hints at interest rate cut

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10 January 2020


The pound lost ground against its major peers on Thursday, sent fairly sharply lower after outgoing governor of the Bank of England, Mark Carney, hinted at the possibility of an interest rate cut in the UK.

peaking at an event covering the future of inflation targeting, Carney took the market by surprise by saying ‘if evidence builds that the weakness in activity could persist, risk-management considerations would favour a relatively prompt response’. He also stated that there was room to ‘at least double’ the bank’s quantitative easing programme, given the ‘relatively limited’ space to cut the bank’s base rate.

While the governor did not explicitly state that lower rates were on the horizon, yesterday’s speech indicates that rate-setters in the UK are at least keeping their options open to cut rates should macroeconomic data fail to improve. The BoE is now very much in data-dependent mode, with Carney stating that they will be watching business and consumer confidence data ‘closely’ to gauge how the UK economy is faring.

The debate regarding whether or not to increase monetary stimulus appears to already be taking place within the bank’s MPC according to Carney, as policymakers consider measures to increase both growth and inflation in the UK economy. This is not a real surprise, given that two of the nine members on the committee have already voted in favour of lower rates in the past few months.

While our base case at present remains for stable rates in the UK this year, the growing possibility of a cut following Carney’s speech has hurt the pound in the past 24 hours. The UK currency fell by around three-quarters of a percent versus the US dollar, although it managed to recover around one-half of these losses during Asian trading.

Fed members talk up stable rates in US

The euro has been very rangebound in the past 24 hours, hovering around the 1.11 level against the US dollar during that time. Thursday’s better-than-expected German industrial production numbers that we covered in yesterday’s report had little impact on the common currency. Investors at present appear far more interested in news on the geopolitical front, rather than macroeconomic data that has actually begun to shown signs of surprising to the upside in the Euro Area.

In the US, comments from Federal Reserve members Clarida, Kashkari and Williams all supported our view that interest rates are likely to remain on hold in the US throughout 2020. Clarida said that the Fed was in a ‘good place’, Kashkari stated his view that stable rates were appropriate, while Williams claimed that low interest rates globally were here to stay for a long time yet. None of these comments really had any big impact on the dollar, given that this is largely in line with what the market is already pricing in.

The key for EURUSD today will be this afternoon’s all-important US nonfarm payrolls report. Investors are eyeing a job creation number of 164k and earnings growth in excess of 3% YoY. Following Wednesday’s much stronger-than-expected ADP employment change number, we think that risks to the job created data are skewed to the upside. As mentioned yesterday, however, the predictive power of the ADP number has waned in the last few months and we have actually seen a noticeable divergence between the two. It will be interesting to see whether that trend persists this afternoon.