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Sterling Rallies as BoE Designate Carney Commits to a Flexible Inflation Target

By Benjamin Spier
07 February 2013 15:09 GMT

THE TAKEAWAY: BoE Governor Designate Carney commits to a flexible inflation -> Carney’s remarks not as dovish as many expected -> GBP/USD rallies above 1.5700

Four months ahead of the start of his term as Bank of England Governor, Mark Carney told UK lawmakers that he thinks a flexible inflation target is preferable over a nominal gross domestic product target. By flexible, Carney said he meant that the BoE could decide on the speed upon which to reach its inflation target.

Carney’s comments today refuted earlier speculation that he would push to adopt the nominal GDP target; the speculation followed Carney’s remarks in January that central bankers may abandon inflation targets for growth.

While discussing the idea of switching to a nominal GDP target to determine monetary policy, Carney explained that people don’t understand a nominal GDP target and continue to behave as if there is a 2% inflation target. Carney also said that the BoE should consider a Fed-style guidance in which policy is time contingent or contingent on the state of the economy.

On past BoE policy, Carney said he thinks the central bank has appropriately provided stimulus to the economy. However, Carney added that the BoE must exit unconventional policy. He also said that the twelve BoE meetings a year verges on too many.

Finally, regarding Pound strength, Carney said that central banks can’t be indifferent to FX moves, but intervention shouldn’t be used if other tools are available.

Carney’s comments were a lot less dovish than expected and were quickly accompanied by an 80 point rally in GBP/USD trading. However, most of the rally was unwound as Carney continued to speak, and the pair continues to trade around 1.5700 at the time of this writing. The pair may see resistance by a resistance line around 1.5750 and support by a recent 5-month low around 1.5630.

GBPUSD Daily: February 7, 2013

Sterling_Rallies_as_BoE_Designate_Carney_Commits_to_a_Flexible_Inflation__body_gbpusd.png, Sterling Rallies as BoE Designate Carney Commits to a Flexible Inflation Target

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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07 February 2013 15:09 GMT