Hawkish BoE Governor Lifts Sterling

Sterling has soared following hawkish comments from the BoE Governor, Mark Carney, indicating that the UK central bank might become the first among the major global central banks to start raising its interest rates. Meanwhile the Chancellor, George Osborne, bestowed the central bank with new powers to restrict mortgage lending and control the overheating UK housing market. Across the Atlantic, today’s Reuters/Michigan consumer confidence data will gain increased attention following soft retail sales data yesterday. In Europe, today’s inflation reports from most European economies further validated the need for the ECB’s extraordinary policy measures announced last week.

Pound Sterling – UK Markets

Hawkish comments from the BoE Governor, Mark Carney, late yesterday led the Pound to move sharply higher against the majors and is trading close to the 1.70 mark against the US Dollar this morning. The Governor firmly indicated that the central might start raising its benchmark interest rate sooner than market expectations, as strong performance of the UK labour market continued to boost the nation’s overall economic recovery, evidenced by today’s credit rating affirmation by Fitch on the UK economy. However, the Governor expressed concerns over the housing market which might undermine financial stability. Earlier yesterday, George Osborne indicated that he would give the BoE new powers to cap mortgage lending which might serve as an alternative tool to monetary policy for cooling an overheated housing market. Against this backdrop, next week’s Financial Policy Committee meeting will attract market attention. With little on the domestic front today, next week’s consumer price inflation and retail sales data in the UK is expected to further validate that the economy is on the path to recovery during the second quarter.

US Dollar – US Markets

The US Dollar is trading on a weaker footing against the Pound as comments from the BoE Governor heightened speculation that a tighter monetary policy is in the offing in the near future. For further direction, markets will keep a close watch on today’s Reuters/Michigan consumer sentiment which is likely to show an improvement for June. In the forthcoming week, most market attention will be focused across the Atlantic to gauge the inflation trend in the nation along with the Fed monetary policy meeting for further direction. Market participants will try to gauge the timing of an interest rate hike in the wake of continued recovery in the world’s largest economy. Data released yesterday showed that retail sales growth unexpectedly slowed for May while first-time applications for jobless benefits climbed last week, leading the greenback to trade under pressure against the common currency in yesterday’s trading session. However, the data is unlikely to alter current market perception that the economy is gaining traction during the second quarter following a setback witnessed during the first quarter, mainly due to harsh weather conditions.

Euro – European Markets

The Euro is trading lower against the Pound this morning following hawkish comments from the BoE Governor, Mark Carney, late yesterday, wherein he announced that the central bank might initiate a hike in its benchmark interest rate sooner than expected on the back of a steady economic recovery in the UK. Data released earlier today confirmed that inflation in most European economies eased for May, thereby validating the ECB’s move to act against falling prices. The Euro advanced against the US Dollar yesterday following disappointing US retail sales and jobless claims figures. Additionally, Euro zone monthly industrial output rose more than expected for April on the back of an increase in energy and non-durable goods production. However, in contrast to the views expressed by ECB policymakers lately, the Bundesbank Chief, Jens Weidmann, reiterated his opposition to the ECB using asset purchases as a monetary policy tool. He had expressed similar criticism when the central bank unveiled the OMT bond purchase programme, thereby once again signaling that there remains a section of policymakers in the central bank who are averse to the ECB embracing unconventional tools along the lines of QE in the US.

Other Currencies – Highlights

Along expected lines, the Bank of Japan held its key interest rate unchanged and maintained its ultra-loose monetary policy steady in its monetary policy meeting today. However, the Japanese Yen reacted negatively and dropped against the majors in today’s trading session. The BoJ expects the Japanese economy to continue to recover moderately despite some headwinds caused by the consumption tax hike in April, while reiterating that it is confident of achieving its 2% inflation target. Separately, reports indicated that tensions between Japan and China might escalate, following a threat over China’s Air Defense Identification Zone, after a Japanese plane invaded the area. Moreover, soft Japanese industrial production data for April added pressure on the Japanese Yen. In the absence of major economic releases in Japan, markets will keep a close watch on today’s US Reuters/Michigan consumer sentiment for further direction. Additionally, ongoing concerns in Iraq where it appears that Iraq is moving closer to a civil war is likely to impact market sentiment going forward.