Monday, 18 August 2014

Pound recovers over interest rate confusion

Monday 18th August 2014 
Things can move very quickly in the currency markets, and the Pound has recovered some of its losses today. So what has caused the Pound to rise? Strangely it is exactly the same as what caused it to fall last week; comments from the Governor of the Bank of England, Mark Carney. In today’s report I’ll look at the mixed signals he is giving on interest rates, and why this is affecting exchange rates.

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Mark Carney continues to confuse the market over interest rates 


In my post last Wednesday, I explained that it was the expectation of interest rates going up in the UK that has been pushing the Pound higher and higher this year. Last week however Mark Carney hinted that rates would not be going up this year, and that is what caused the Pound to drop last week. (Higher interest rates strengthen a currency and vice versa).

Over the weekend however in an interview in the Sunday Times, he was very non-committal, saying that holding off raising rates is "an expectation not a promise"

He seems to change his mind quicker than the weather in the UK; one week he says that “rates would not rise above their current historic low, of half a per cent, before next year because of a "remarkably weak" rise in real wages.” and just a few days later he says that “the base rate may have to go up before households enjoy a rise in living standards.” 

So which is it? Confused? We are, and I think Carney may be too!  A little while ago his mixed signals over interest rates have been compared by one MP to him blowing hot and cold, like an unreliable boyfriend, and it's causing volatility in exchange rates.

What effect has this had on exchange rates? 


His comments last week caused the Pound to fall, however this morning the Pound was up again as markets try to decipher when interest rates will go up. 

So which was could rates move in the coming weeks? It’s impossible to know, and much will depend on what Carney says next.

The most important releases for the UK will be Wednesdays Bank of England minutes. These will show what Carney and his Monetary Policy Committee discussed when they recently decided to keep rates on hold. With Carney not giving a very clear picture on what his thoughts are with interest rates, these minutes will be watched very closely to try and decipher what the other 8 members of the rate setting committee think. If one or more of them voted for a rate hike, expect exchange rates to go up. If all 9 members voted to keep rates on hold, expect the Pound to fall. 

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