British Pound Soars Before BOE Sounds Off on Financial Stability

Talking Points:

• Pound soars with risky assets before BOE’s Carney speaks on financial stability
• Anti-risk Yen plunges, sentiment-linked Aussie and NZ Dollars rise with shares
• US Dollar eyeing Fed-speak as interest rate hike speculation shows signs of life

Central bank commentary is back at the forefront for financial market. First, the Bank of England will publish minutes from the post-referendum FPC meeting and policymakers including Governor Mark Carney will testify on financial stability before Parliament’s Treasury Committee.

With the markets steadying after a sharp deterioration in financial conditions in the immediate aftermath of last month’s UK EU membership referendum, traders may be most interested in what the central bank is doing to soften Brexit’s longer-term implications.

A broad range of concerns is likely to be discussed but the central question in need of answering seems to be whether post-referendum volatility met, exceeded or undershot the BOE’s projections. Getting some sense on that may emerge as a formidable driver for market-wide sentiment trends in the near term.

Sentiment was decidedly rosy overnight amid apparent pre-positioning for a an upbeat BOE assessment, with the British Pound rallying alongside risk-on assets including shares well as the Australian and New Zealand Dollars. The anti-risk Japanese Yen traded sharply lower.

Fed-speak will be in the spotlight later in the day as comments from Governor Daniel Tarullo as well as St. Louis and Minneapolis branch Presidents James Bullard and Neel Kashaki cross the wires. Policy bets have quietly firmed, with the chance of 2016 rate hike more than doubling this week compared with the last.

The US Dollar seemed to find a degree of support in the past 24 hours from cautiously hawkish remarks from Esther George and Loretta Mester – Presidents of the Kansas City and Cleveland Fed branches. It will be interesting to see if this can be sustained in event that less overtly pro-tightening officials follow suit.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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