Carney Comments Trigger GBP Sell Off

The Pound experienced a sharp sell off yesterday as a direct result of a speech from Bank of England Governor, Mark Carney. While this has had an immediate effect on the strength of the UK’s currency, this sentiment will linger for some time and the impacts felt certainly into the medium term.

Firstly, Mr Carney explained that the Bank of England remains ready to deliver a prompt response to fiscal weakness in the UK so that really was the first hint that a rate cut could be on the cards. But the much clearer indication of their attitudes towards the current economic climate lay in the sentence: ‘There is a debate at the MPC over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation’. Directly citing stimulus and reinforcing recovery seems to be a very clear signal of intention from the Bank. There were rising expectations of an interest rate cut at some stage this year but this will bring forecasts of this happening much earlier than expected. Very generally, as a country reduces interest rates the strength of its currency retreats, there are many reasons for this; among them, reduced interest rates diminish investment yields and so investors redirect money away from the currency and it can be seen as signalling low price pressure/low inflation which is normally an indicator of a weak economy. As a result of Carney’s talk, the GBP lost 0.5% very quickly, though this is coming back slowly this morning. There are elements of surprise to this, given that so many expected the Conservative election win enough to consolidate business confidence and restore some vigour to the economy. It will be interesting to see the economic data that eventually comes out post-election, if it is strong it would be hard to justify a rate cut.

Regarding Brexit, the Withdrawal Agreement Bill has finally been backed by MPs with a majority of 99 votes so we can be confident that an exit will be affected by the date of 31 January. Had this news come at a time where Carney was not discussing fiscal weakness, the UK might have expected a lift in the strength of the Pound given it brings to a close years of political uncertainty and dissent. Uncertainty being the overarching factor weighing on the Pound for much of the last 18 months at least. So, from here, the bill will now go to the House of Lords so that they law will be ratified.

To add to the debt story from The World Bank’s report, further details cast an unfortunate pall on the outlook for the global economy. A modest rebound in growth is expected: The global economy looks set to grow 2.5% this year, slightly better than the 2.4% estimate for 2019, though both yearly estimates are lower than the last forecast released in June (2.6% for 2019 and 2.7% for 2020).

The 189-country lending institution trimmed its outlook for this year, expecting the weakest growth since the global financial crisis as the world economy remains vulnerable to geopolitical tensions and a potential re-escalation of the ongoing trade war between the U.S. and China.

Growth among advanced economies is set to decline 1.4% in 2020—thanks in part to a global slowdown in manufacturing, while growth in emerging market and developing economies, spurred by a smaller group of large economies, will rise 4.1% according to Bank’s forecast.

Rates at the time of writing:

GBP/USD – 1.3051

GBP/EUR – 1.1764

EUR/USD – 1.1095

The figures are based on the live mid-market rate, correct as of 08:30 GMT on 10/01/2020, and are provided for indicative purposes only. Live mid-market rates are not available to consumers and are for informational purposes only. The rates we quote for money transfer can be selected via the page on our website ‘Live Money Transfer rates’.

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