Sterling Firmer as Carney, Broadbent Steady Rate Hike Expectations

The British pound looks set to end what has been a decidedly poor month with some gains.

The change in sentiment towards the UK currency comes following the intervention of Mark Carney and his deputy, Ben Broadbent, in the all-important interest rate debate.

As a general rule: Rising interest rates = a rising pound, falling interest rates = a falling pound.

The prospect of a UK interest rate increase in 2015 had spurred the pound to 7 year highs against the euro at the start of the month.

However, a warning by BoE Chief Economist Haldane that interest rates could in fact be cut served to completely undermined the rally and send GBP into reverse.

Broadbent, Carney Have Their Say

Step in the two most senior members of the Bank of England’s decision making body.

The Governor of the Bank of England, Mark Carney and his Deputy, Ben Broadbent are the latest decision makers to intervene in the debate over interest rates.

The comments by Carney were negligible in length, yet forceful in their impact.

At a discussion at the Bundesbank conference in Frankfurt Carney commented:

“We're still in a position where our message is that the next move in interest rates is going to be up."

Broadbent meanwhile argues that the risk of a dangerous, protracted spell of UK deflation is low.

The falling of inflation to 0% in the previous month heightened market speculation that the BoE would opt to delay rate hikes.

Instead, Broadbent argues, UK inflation will begin to pick up again and the next move in rates will be up, not down.

This should not come as a surprise; the Bank of England communicated this exact message in their last Quarterly Inflation Report.

Indeed, we reported yesterday that markets may be getting a little over-excited over the prospect of interest rate cuts.

Market consensus on the first rate hike is seen in early to mid-2016. However, analysts at Lloyds Bank are not buying this story and maintain their initial call for the end of 2015.

What Does All This Mean for the Currency Outlook?

We would expect the impact of these recent events to play positive on GBP in the near-term.

The recent sell-off has been deep and we would expect a number of speculators and corporates to step in and secure discounted sterling where possible.

However the extend of the rally should remain limited as we head into the election cycle.

Analysts continue to warn that GBP will be prone to volatility as the pantomime plays out.

Only once the next government is in place would we be confident of seeing a resumption of the longer-term uptrend that took us into March.