The Pound-to-Dollar Rate Clobbered by BoE Governor Carney as Technical Outlook Grows Darker  

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- GBP hurt by BoE Governor Carney's comments on interest rate outlook. 

- Hints global slowdown, Brexit could reduce August inflation forecasts.

- Any downgrades would impair interest rate outlook and weigh on GBP.

- Techncial outlook favours more GBP/USD downside says Commerzbank.

The Pound was clobbered Tuesday by Bank of England (BoE) Governor Mark Carney, who's keynote speech in Bournemouth cast further doubt over the bank's long-standing mantra that UK interest rates will need to rise over the coming years, right as the technical picture on the charts is growing darker.

Governor Mark Carney addressed an audience at the Local Government Association Annual Conference and Exhibition 2019 in Bournemouth Tuesday, where he appeared to do all he could to underline the potential upside in UK asset prices in the event a 'Brexit deal' is reached with EU. 

"As the perceived probability of a No Deal has picked up, the levels of Bank Rate, sterling and other UK asset prices in our projections have therefore become increasingly inconsistent with the smooth Brexit assumption," Carney told the audience. "It just highlights the extent to which the levels of interest rates, sterling and other asset prices might increase if a deal were reached. The MPC will explore how to best illustrate these sensitivities as we update our projections for the August Inflation Report."

However, the governor also had to acknowledge the deteriorating condition of the global economy and growing risks to the UK economic outlook. He laid blame for the former directly at the feet of U.S. President Donald Trump in candid remarks that are rare among central bankers. 

"In the UK, the combination of the relatively strong initial conditions – including a tight labour market and inflation at target – and the prospect of greater clarity emerging in the near term regarding the UK and EU’s future relationship argues for a focus on the medium term inflation dynamics. These will be importantly influenced by global developments and even more so by the form that Brexit takes," Carney added.

Above: Pound-to-Dollar rate shown at hourly intervals.

UK inflation has been at or above the BoE's 2% target for much of the time since the Brexit referendum of June 2016 and with the economy having growing grown at or above the pace the bank calls 'trend' in recent years, Carney and his colleagues have consistently argued that interest rate hikes will be necessary over the coming years. 

The Bank of England has already lifted Bank Rate by a total of 50 basis points, to 0.75%, since the final quarter of 2017 and its arguably the long-standing commitment to higher rates that's prevented Pound Sterling from suffering another run akin to that seen after the referendum during 2019 as the Brexit farce played out in parliament. 

But Carney's admission that the global economic environment is almost as important to the medium-term inflation and interest rate outlook as the outcome of the Brexit process may have been what upset the market Tuesday because the deteriorating outlook has seen central banks the world over preparing to cut rates, not raise them. 

"In recent months, the expected paths of policy interest rates in advanced economies have shifted sharply lower, most notably in the US where an expectation of two further rate hikes over the next three years has flipped to four rate cuts by the end of next year. In the euro area, markets have begun to price in further rate reductions and asset purchases," Carney acknowledged. 

Above: Market expectations of UK, U.S. and ECB interest rates. 

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators.

Capital flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency. Rising rates have the opposite effect.

Pricing in the overnight-index-swap market already implied on Tuesday, a December 19 Bank Rate of just 0.66%, which is below the current rate of 0.75% and suggests that investors see a meaningful possibility that rates will be cut before the BoE's final meeting of 2019.

Any further suggestion from the Bank that rates might not rise over the coming years after all would likely be met with yet more Pound Sterling weakness. Carney's comments and the resulting falls in the Pound came as the technical picture on the charts grew darker on Tuesday.

Above: Pound-to-Dollar rate shown at daily intervals. 

"GBP/USD continues to hold below the 1.2763/72 resistance (the 7 th June high and February low) and we maintain a slightly negative bias. It charted a key day reversal on Tuesday last week and the Elliott wave count on the daily chart has turned negative implying that the market has failed here and is likely to slide back to the 1.2600 region and potentially the 1.2559/1.2506 recent lows," says Karen Jones, head of technical analysis at Commerzbank. "Below 1.2506 would target the 1.2444 December 2018 low. This is the last defence for 1.2108, the 78.6% retracement of the move up from 2016."

Jones, whose views are based on studies of trends and momentum on the charts, says Sterling will need to regain last week's high of 1.2784 against the Dollar in order to draw a firm and sustainable bid from the market again. 

However, she also says the British currency would likely run out of steam if and when it reaches the 200-day moving average located at 1.2913. Last week the Commerzbank team closed their earlier bet that the Pound-to-Dollar rate would go on rising and briefly began recommending to clients that they bet against the British currency, but they've since closed that bet too.  

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