Carney Sparks Rally by GBP-crosses, Leg Down for USDOLLAR
- GBPUSD jumps nearly +1% on Carney rate hike commentary.
- USDOLLAR Index weighed by GBPUSD, not by AUDUSD.
Among developed economies right now, there are only two that have central banks that are considering to tighten their respective monetary policies: the Bank of England and the Federal Reserve. As the market gears up for Fed Chair Janet Yellen's semi-annual testimony to Congress tomorrow and Thursday, it's BoE Governor Mark Carney who is making waves will comments on the path of future policy this morning - much to the British Pound's liking.
At his own hearing before a Treasury select committee, Governor Carney suggested that households should adjust for the "expectation of upward movement of rates." This doesn't necessarily mean that rate rises will be quick or by great margins; he added that he sees "no scenario where rates would move towards historic levels.”
Markets are taking kindly to the comments that the BoE, while not entertaining a series of extended rate hikes, will be one of the first central banks to normalize policy in the post-crisis era. On the back of the comments, the Credit Suisse overnight index swaps (OIS) priced in an addition +4-bps over the next 12-months, to +41.0-bps in total. Similarly, the likelihood of a rate increae over the next 12-months increased from 67.2% yesterday to 70.2% today, the implied probability per the Sterling 90-day options contract; the chance of a March 2016 rate hike increased to 62.7% from 58.7%.
We've previously made the case for long GBP positions (namely via GBPCAD and GBPNZD), and it there may still be opportunity given the catalyst at hand: rate expectations around the timing of the BoE's first rate hike are starting to shift forward.
See the above video for technical considerations in EURUSD, AUDUSD, USDCAD, GBPUSD, EURGBP, and the USDOLLAR Index.
--- Written by Christopher Vecchio, Currency Strategist
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