Foreign Exchange - UK Weekly Update - Tuesday, February 12, 2013 17:28 - 0 Comments

Carney’s comments prompt brief sterling resurgence

Most of last week’s movements in sterling’s major crosses centred on the central bank decision announcements towards the end of the week and their accompanying press conferences, not least Draghi’s denouncement of a strong euro. Mark Carney also appeared in front of the UK Treasury Select Committee and his comments regarding the Bank of England’s monetary policy for the next five years lent the pound a helping hand following the pasting it received in previous weeks.

UK PMI releases in the first half of the week were mixed, as they have been throughout the start of the year. Whilst construction PMI maintained the poor January number of 48.7, stuck in contraction territory, services PMI surprised to the upside on Tuesday to level out the ‘good news, bad news’ balance. The rut that the UK economy has found itself in is exemplified by the distinctly average PMIs posted week-in, week-out at the moment and this weighed on the pound, sinking it into the mid-1.56s against the dollar and pushing GBPEUR back down to 1.1520 by late afternoon on Tuesday. However, the sudden move down suggested that it perhaps wasn’t just disappointing PMI responsible for the drop in sterling but also some traders manoeuvring in advance of Mark Carney’s first full public showing as the Bank of England’s Governor-to-be.

These traders seemingly had one eye trained on chatter surrounding Carney’s appearance and the other following the decisions reached by the current BoE Governor and the Monetary Policy Committee on Thursday. Some analysts spent Wednesday speculating whether the pound would break lower against the dollar as it was bouncing along the bottom just below 1.565, yet Wednesday was relatively quiet with GBPEUR and GBPUSD both remaining bound within a narrow half-cent range. This was attributable to the lack of Tier-1 data releases, given that German Factory Orders posting well below expectations was the only release worth talking about.

Thursday morning was greeted by a slew of better-than-expected UK economic indicators, ranging from modestly-below-expectations trade deficit figures to monthly increases in industrial and manufacturing production, both of which posted an annual decline less severe than the market consensus. The market, however, barely twitched, as everyone eagerly awaited the central bank decisions and, to a lesser extent, Mark Carney speaking at Parliament before the Treasury Select Committee. Carney impressed most with his apparent intention to bring an end to QE over the course of his five-year tenure, despite a pledge to keep loose monetary policy with flexible inflation targeting until the economy is growing again. It was enough to spur the pound higher and we’ll likely get a better idea of his mandate when he takes over the reins from Sir Mervyn King in July.

Both the Bank of England and the ECB kept rates unchanged on Thursday, with the former also resisting pulling the trigger on further asset purchases. Pending the MPC minutes release in the next fortnight, the odds are stacking up for some measure of QE to be announced following the meeting in March. Of greater note were Mario Draghi’s comments in the subsequent press conference, who indicated that although a strong euro was evidence of greater confidence in the Eurozone and single currency, it could pose a risk to the bloc’s economic prospects should the euro continue to appreciate. The market heeded this warning, promptly shedding some of the single currency’s recent gains and allowing GBPEUR to close the week north of 1.18.

In terms of data, there are a few releases in the week ahead that are worth watching for. UK inflation figures are due Tuesday morning, we have the Bank of England’s inflation report on Wednesday, and European and German GDP readings on Thursday.

Have a good week.