Market News & Insights
19 September 2017

Carney Pulls Back On Rate Hike Talk

There was some interesting price action to welcome the markets back yesterday. The USD entered the week looking towards Wednesday’s FOMC meeting and markets are looking to assess whether we will see another rate hike before year end. Despite USDJPY rallying to 7 weeks highs, the broader based USD failed to regain September highs and thus far today the greenback has found itself facing some selling. GBP was an under performer on the day, giving back some of its September advance as BOE Governor Mark Carney stepped back on last week’s hawkish BOE, suggesting any rate hikes would be gradual and spare capacity in the UK economy is being eroded faster than expected. The resulting sell off in GBP brought GBPUSD back from highs above 1.3600, while EURGBP rallied up from support at .8780. General risk sentiment remained firm throughout the day, with European sticks closing near 6 week highs, while in the US session we saw record levels traded once again and stocks pressed higher, and overnight in Asian trading the NIKKEI traded over 2 % higher.

The pullback from the BOE’s Carney is not surprising, we certainly do not expect to see the BOE hike rates any time soon and despite markets shifting their expectations based on last week’s BOE meeting, the reality facing the UK economy is that a rate hike too soon could well cause greater damage than higher inflation is causing currently. For all intents and purposes, there is nothing clear or concrete emerging from Brexit negotiations and for the most part we are as in the dark as we were 15 months ago when the vote first passed. The BOE are unlikely to step up to raise interest rates while great uncertainty remains, however some jawboning may well just help his position and if he can talk up the pound without having to raise rates, by letting the market price a stronger pound he can alleviate some of the pressures on inflation without having to take any action. Nothing much from the UK today and as such we may well see the pound continuing to correct last week’s advance. EURGBP will find resistance to the upside just below .8900, while firmer resistance and a good opportunity for Euro sellers will be towards .8990. Support at .8770/85 area should hold for now. GBPUSD upside resistance above 1.3600 will provide opportunity for GBP sellers, while 1.3465 and yesterday’s lows hold as support for now.

There is not much in terms of major data from Europe today, the German ZEW survey is the pick of the action and although it is generally classed as a high impact release, it is unlikely to carry any bearing on the ECB or their approach to policy, as such is unlikely to provide any lasting direction on trend. The Euro however has found itself in demand through the opening of the week and a stronger print may well just give the Euro another short term leg up. EURUSD now looking at 1.2000 which is a previous area of support resistance, a break above there and markets will be looking towards highs, with major Euro sellers between 1.2070 and 1.2100 area.