Unless you were too busy Googling the best types of gifts to give your significant other this Valentines season, you should know that Bank of England’s (BOE) Mark Carney caused a broad pound rally yesterday. Why was his inflation report so well-received anyway? Here are three possible reasons.
1. Optimistic growth and inflation forecasts
The central bank now expects economic growth to hit 3.4% in 2014, up from its 2.8% estimates in November. It also upgraded its 2015 growth forecasts from 2.3% to 2.7%.
The BOE isn’t too worried about inflation either. Carney and his gang believe that consumer prices will be under control (read that as under their 2% target) and even fall to 1.86% by Q4 2014. What currency bull could say no to that?!
2. “Second phase” of forward guidance = More room to raise rates
After assuring that the BOE’s forward guidance is working, Carney went on to enumerate the “next phase” that will guide the central bank’s future interest rate decisions:
1. The BOE is providing guidance to absorb all the spare capacity in the economy.
2. There’s scope to absorb spare capacity before raising interest rates.
3. If and when the time comes that the economy recovers, interest rates will be raised GRADUALLY.
4. The level of interest rates necessary to sustain low unemployment and price stability will be materially lower than before the crisis.
5. The Monetary Policy Committee (MPC) will maintain its asset purchases until the first rate hike.
The “new phase” above seems to center around spare capacity or the underperformance of economic factors like labor. This means that the MPC will now monitor a broader range of factors including participation rate in the labor market, average hours, labor productivity, and others before raising its rates.
While economic geeks are appalled by the additional conditions for interest rate hikes, many traders simply focused on the fact that the BOE now has more control in raising its rates as it’s not tied to a single economic indicator.
3. GBP was technically poised for more gains
The addition of new conditions to rate hikes should have made the bulls run away from the pound. But it was simply easier to buy it especially when the pound was at strong technical support levels across the board.
At the time of the release GBP/USD and GBP/JPY were at support and resistance levels, EUR/GBP’s consolidation was begging for a catalyst, and GBP/AUD’s double bottom was waiting to play out.
How about you? Did you make any pips from the pound’s moves yesterday?