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British Pound Drop May Deepen on Carney Comments

British Pound Drop May Deepen on Carney Comments

2017-01-16 08:51:00
Ilya Spivak, Head Strategist, APAC
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Talking Points:

  • British Pound sinks on “hard Brexit” fears before key May speech
  • Yen and US Dollar rise, commodity FX suffers amid risk aversion
  • BOE Governor Carney may take a dovish tone as event risk looms

The British Pound faced broad-based selling pressure in overnight trade. The currency gapped sharply lower at the weekly trading open after The Sunday Times said that Prime Minister Theresa May will come out in favor of “hard Brexit” – taking the UK out of the EU single market – in a major policy speech on Tuesday.

The jolt metastasized into broad-based risk aversion. Stocks fell across most Asian bourses while the anti-risk Japanese Yen and US Dollar traded higher. Appropriately enough, the sentiment-sensitive Australian and New Zealand Dollars suffered outsized losses that only trailed those of Sterling itself.

Looking ahead, scheduled commentary from Bank of England Governor Mark Carney headlines an otherwise underwhelming economic calendar. Traders will look for guidance about how the central bank intends to balance risks posed by rising inflation and headwinds from Brexit uncertainty.

Thus far, Mr Carney and other bank officials have attempted to strike a cautious balance, saying they are prepared to look through overshooting their inflation target in the near term but stand ready to tighten if necessary. This sounds fancifully precise and markets will want the reaction function made clearer.

The BOE Governor has frequently used rhetoric as a policy tool. The relatively smooth passing of last year’s EU referendum is in large part owed to the central bank’s reassuring rhetoric and subsequent willingness to back it up with action.

That Mr Carney is speaking a day before the Prime Minister is conceivably a tactical move meant to remind investors that the BOE is well-armed and ready if the markets get too wobbly. If this translates into a relatively dovish tone, the selling pressure facing the UK currency may be amplified.

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Asia Session

British Pound Drop May Deepen on Carney Comments

European Session

British Pound Drop May Deepen on Carney Comments

** All times listed in GMT. See the full DailyFX economic calendar here.

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

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