British Pound a Big Winner of the Introduction of Forward Guidance

Wednesday is one of those key days that has the tendency to determine the future direction for the UK currency as the long term policy at the Bank of England is communicated. We bring you the latest views and predictions ahead of the Bank of England's quarterly Inflation Report. And, of course, we will cover the event as well as the subsequent price action in the British Pound Sterling (Currency:GBP).

Highlights:

@08:26: Overly aggressive unemployment threshold will likely sink Sterling.
@09:17: A strong bias against the British Pound still persists.
@10:30: GBP sinks on Bank of England Inflation Report Press Conference.
@11:00: GBP in strong recovery - volatility is the order of the day.
@12:27: GBP in hefty gains.

19:10: A great day for the British Pound

The GBP/EUR is 0.7 pct higher on a day-to-day basis at 1.1617.
The GBP/USD is 1 pct higher at 1.5495.
The GBP/AUD is 0.73 pct higher at 1.7212.
The GBP/NZD is 0.09 pct higher at 1.9448.
The GBP/SGD is 1 pct higher at 1.9638.
Be aware: The above quotes are taken from the wholesale markets. Your bank will affix their own discretionary spread to the figure which will be reflected in a lower retail exchange rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

19:00: Thursday devoid of data, technical forecasts to be the order of the day

There are no major data events for GBP tomorrow.

The GBP has settled into higher ranges all around; on Thursday we will start assessing the implications for the GBP's technical forecasts as a result of today's gains.

14:34: GBP/USD forecast at 1.45 by year end

Despite today's positive reaction in GBP/USD, the outlook still favours the US dollar says Camilla Sutton at Scotiabank. Latest views on the outlook for GBP here.

14:00: Latest reactions

Chancellor George Osborne has written a letter to Mark Carney welcoming the Bank's decision on linking the interest rate to unemployment, as well as the "important approach of allowing the threshold to be "knocked out" if there are material risks to price stability or financial stability".

Pound Sterling Live has just published a host of currency-related reactions here.

12:27: Pound Sterling surges higher

Currency markets have decided they like what they heard at today's Bank of England Inflation Report press conference. Sterling has surged:

• GBP/EUR is now 0.75% higher at 1.1621.
• GBP/USD is 0.68% higher at 1.5452.
• GBP/AUD is 1.2 pct higher at 1.7284.
• GBP/CAD is 1.18 pct higher at 1.6106.
• GBP/SGD is 0.72 pct higher at 1.9588.

Be aware: The above quotes are taken from the wholesale markets. Your bank will affix their own discretionary spread to the figure which will be reflected in a lower retail exchange rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

12:21: Bank's threshold of 7% could mean little

Interesting, and timely, viewpoint from Ethan Harris at Bank of America Merrill Lynch Global Research.

The US Fed is credited with leading the Bank of England to where we are today. And the Fed and US economy is a step ahead of us.

This is what Harris says concerning the US economy / Fed and unemployment targeting:

"The unemployment rate fell to just 7.4% in July, bringing it within spitting distance of the 7% "threshold" for ending QE.

"However, Fed officials have been very clear that the unemployment rate is just one of many indicators they are looking at and other data remain weak.

"We expect the Fed to override its 7% "threshold," and continue QE, if the drop in unemployment is not associated with a broad-based recovery in the economy."

Would the Bank of England MPC do the same?

12:11: Will Pound Sterling Perform Better From Here?

Andy Scott at HiFX welcomes the potential stability that today's Inflation Report may well provide:

“Now that the market has had the forward guidance confirmed and no longer has to speculate, this could actually be very positive for the pound since the economy is now performing better.

"Investors don’t like uncertainty and that’s shown in the value of sterling since Mr Carney began his tenure at the start of July. Perhaps now its value will better reflect the relative outperformance of the economy, particularly against our main trading block the Eurozone."

10:43 -  11:36: Q&A Session - Sterling in strong recovery

• 10:43: Charlie Bean, Deputy Governor, says 'we have a better understanding' of the equilibrium of the unemployment rate.
• GBP/USD is 0.5 pct in the red, GBP/EUR 0.3 pct lower.
• Carney confirms inflation is still key target of the MPC.
• Carney: Unemployment is important because it is best indicator of conditions in the economy at which the MPC would 'begin to consider' withdrawal of 'exceptional' stimulus.
• Help to Buy scheme will be watched closely, 60K is a key level for mortgage applications - we still well below this level. Not concerned about this issue it appears.
• 10:58: GBP/EUR now only 0.18 pct in the red, GBP/USD recovers to 0.27 pct in the red.
• 11:00: Are we at escape velocity? NO says Carney.
• 11:00: Wow - sterling now higher versus the US dollar. GBP/USD 0.12 pct up a 1.5357. GBP/EUR now 0.11 pct higher at 1.1549. Volatility in sterling as traders try to make sense of today's event (click to enlarge the graph on GBP/EUR volatility):
• 
• 11:11: So Bank does not see unemployment at 7% till 3q 2016. A long time of low interest rates ahead then.
• 11:14: Carney says this guidance is beneficial as "it allows us to test the degree to which productivity will recover alongside demand" Bean says MPC disapointed by UK's poor trade figures. Bean - LOW UK EXCHANGE RATE HAS HELPED TRADE. Trade now expected to pick up.
• 11:22: Forex.com say: "GBPUSD back testing 1.5400 as the market decides that the BOE has gone for forward guidance-lite."

10:30 - 10:42: Carney is speaking... live coverage. Employment rate to be targeted at 7% - Sterling slumps

• Sterling plummets as Carney mentions 'employment' targeting
• Emphasises slack in economy
• Inflation now being spoke about...sees inflation being flat - GBP in slight recovery.
• Exceptional accomodative policy to remain until slack is recovered
• No interest rate rises until unemployment falls to 7% - Only CPI inflation will be able to sway the MPC.
• 7% only a 'way station'
• Sterling recovers slightly as Carney finishes his set piece

09:17: Be aware - investors are expecting a bearish outcome from the Inflation Report

Chris Walker at Barclays says traders aren't expecting much of a pro-Sterling outcome today:

"Market positioning suggests investors have already priced in a dovish scenario to some extent however, so while we would view this step as a dovish signal, the impact on the currency may not be particularly dramatic.

"The pound’s very modest rally in response to the consistent upside surprises to recent UK cyclical data suggests investors are also unwilling to hold long GBP positions into the event, though activity has been relatively light."

8:35: Spot rates ahead of today's main event

The British Pound Sterling (Currency:GBP) continues to be sold-off in anticipation of today's Inflation Report and press conference. FX traders are understandably wary:

• The Pound Sterling to Euro exchange rate is 0.06 pct lower than seen at last night's close at 1.1530.
• The Pound to US dollar exchange rate is 0.22 pct lower at 1.5316.
• The Pound to Australian dollar rate is 0.13 pct higher at 1.7110.
• The Pound to Singapore Dollar is 0.08 pct down at 1.9431.

Be aware: The above quotes are taken from the wholesale markets. Your bank will affix their own discretionary spread to the figure which will be reflected in a lower retail exchange rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.

8:26: Aggressive unemployment targeting could sink GBP

Kathy Lien at BK Asset Management says she believes the Bank of England will likely base their policy around the unemployment rate.

Any target below 7% could be bad for the Pound Sterling:

"The impact on sterling would be significant if the central bank targets unemployment lower than 7%.  With the current rate of unemployment at 7.8%, a lower unemployment target would imply that the central bank plans to keep rates on hold for the next 2 years.  

"Sterling could also give up its recent gains if the central bank says that interest rates will be not be increased if inflation is less than 1.5% which would be a further commitment to low rates.

8:20: Lloyds Banking Group predict a 'more dovish' tone from Carney

Lloyds Banking Group, predict what we interpret as a rather GBP-negative outcome:

"Today’s focus will be the Bank of England’s Inflation Report press conference at 10.30. While this is always a significant event in the economic calendar, today’s is even more so as the Bank presents its forward guidance assessment.

"We expect the MPC will announce a form of guidance designed to extend the period markets foresee Bank Rate at current levels, beyond the current H2 2015. This looks likely to be based on an intermediate threshold, with an unemployment rate threshold the most likely.

"Beyond any policy announcement, Governor Carney is likely to strike a more dovish tone than recent economic releases would suggest. He will likely concentrate on the scale of spare capacity in the UK economy, rather than recent growth rates.