After showing a bit of weakness in recent trading, it looks like the pound could be in for more losses later on. Check out these three reasons why the pound is looking heavier:
1. BOE is in no rush to tighten monetary policy.
In this week’s BOE inflation hearings, Governor Carney emphasized that the U.K. central bank isn’t looking to tighten monetary policy soon. He pointed out that the spare capacity accounts for roughly 1.5% of GDP, which means that the economy is in no danger of overheating for now and that interest rate hikes aren’t needed to cool it down yet.
Unfortunately for pound bulls, not even strong inflation reports were enough to convince Carney to start tightening. He said that he would like to see the annual CPI around the upper half of the central bank’s target range and further declines in the unemployment rate before policymakers can begin to consider hiking rates.
2. GBP appreciation could hurt the U.K. economy.
Following Carney’s somewhat dovish remarks was Mr. Bean’s claim that a stronger sterling would delay rate hikes. No, I’m not talking about Rowan Atkinson’s comedy character – I’m referring to BOE Deputy Governor Charlie Bean!
Mr. Bean pointed out that the pound has appreciated by nearly 10% over the past year and that further gains could eventually hurt the country’s export industry. After all, a stronger pound would make U.K. exports more expensive in international trade, which could then reduce demand and hinder the BOE’s efforts to rebalance their economy.
3. COT report suggests a potential reversal.
Market sentiment also seems to be hinting at pound weakness, as the latest CFTC Commitment of Traders Report revealed that speculative long pound positions hit a record high last week with current positions near 5-year extremes. As discussed in the School of Pipsology, extreme net long positions could hint that the market has reached a top.
To keep things in perspective though, the U.K. economy is still one of the better performing economies out there so far. However, rate hike expectations do play a huge role in determining forex price action and recent comments from BOE officials seemed to be a major letdown. Do you think the pound is in for more losses? Cast your votes in our poll below!