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Volatility and directional movement were limited on most currency pairs. However, the pound was busy busting the moves yet again.

The pound was actually in recovery mode for most of the session after getting a major smack-down yesterday. However, BOE MPC Member Haldane gave a hawkish speech near the end of the session, and traders reacted by giving the pound a major bullish infusion that turned the slight recovery into a broad-based rally.

  • U.K. public sector net borrowing: £6.0B vs. £7.3B expected, £8.7B previous
  • BOE MPC member Haldane explicitly says that he’s a hawk
  • RBNZ rate decision and statement later

Major Events/Reports

BOE’s Haldane speaks

In yesterday’s London session recap, I pointed out that BOE Boss-Man Mark Carney’s dovish comments sent the pound lower.

I also pointed out that Carney made it clear that he was only talking about his own views and that other BOE members had their own views.

I then quipped that the market was reacting to Carney’s words as if Carney was speaking for the BOE as a whole.

Well, BOE Chief Economist Andy Haldane gave a speech near the end of the session.

And to drive home Carney’s point (which the market seems to have missed) that Carney was only talking about his personal views, Haldane explicitly stated that he was a hawk, even though he didn’t vote for a rate hike during the recent BOE statement.

To quote Haldane himself (emphasis mine):

As the balance point between these risks has shifted over the past 9 months, that has left me judging that a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead. Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.”

How soon is ‘relatively soon’? I considered the case for a rate rise at the MPC’s June meeting. I felt then there were strong grounds for holding back until later in the year, for two reasons. First, despite upwards pressure on inflation, there are still few signs of higher wage growth. And despite robust surveys, there is still some chance of a sharper than expected slowing in the economy. Both are reasons for monetary policy not to rush its fences. Nor does it need to do so, given the slow build of nominal pressures in the economy.”

“Second, there is the election. This has thrown up a dust-cloud of uncertainty. Financial markets-wise, that is manifesting itself in a weaker exchange rate. It is unclear what twists and turns lie ahead, with potentially important implications for asset prices and, at least potentially, confidence among businesses and consumers. I do not think adding a twist or a turn from monetary policy would, in this environment, be especially helpful in building confidence, at least until the dust-cloud has started to settle.”

Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year. As and when the MPC begins this process of normalising monetary policy, it will be a sign of the economy itself having begun to normalise. Far from being a cause for concern, starting the process of withdrawing some monetary policy insurance should serve as a signal of the MPC’s confidence in the UK economy’s resilience and in inflation returning sustainably to its 2% target.”

Risk aversion in full swing in Europe

European equity indices were broadly in negative territory during the session, which is a sign that risk aversion was the name of the game.

  • The pan-European FTSEurofirst 300 down by 0.53% to 1,522.58
  • Germany’s DAX was down by 0.49% to 12,751.75
  • The blue-chip Euro Stoxx 50 was down by 0.65% to 3,542.00

U.S. equity futures also felt the gloomy mood

  • S&P 500 futures were down by 0.12% to 2,434.50
  • Nasdaq futures were down by 0.12% to 5,725.88

Market analysts blamed the downbeat mood in Europe on disappointing reports for individual lending and retailing companies, which then weighed down on financial and retail shares, souring overall sentiment in the process.

Major Market Mover(s):

GBP

The pound spent most of the session licking its wounds after getting stomped hard when BOE Boss-Man Carney delivered his dovish comments yesterday.

Fortunately for the pound, BOE Chief Economist Haldane had a speech near the end of the session and he explicitly pointed that he (Haldane) was a hawk. And while he didn’t vote for a hike in the most recent BOE statement, he did say that he might join the hawkish camp soon if the U.K. economy continues to evolve as expected.

And because of Haldane’s blatant hawkish stance (and possibly because the market overreacted to Carney’s statement yesterday), the pound spurted higher as a result.

GBP/USD was up by 84 pips (+0.67%) to 1.2693, GBP/JPY was up by 106 pips (+0.76%) to 141.40, GBP/AUD was up by 93 pips (+0.56%) to 1.6788

Watch Out For:

  • 1:00 pm GMT: The SNB will release its quarterly Bulletin
  • 2:00 pm GMT: U.S. existing home sales (5.54M expected, 5.57M previous)
  • 2:30 pm GMT: U.S. crude oil inventories (-1.2M expected, -1.7M previous)
  • 9:00 pm GMT: RBNZ rate decision and statement (OCR steady at 1.75% expected); read Forex Gump’s preview here