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GBP/USD Back at Yearly High after BoE Unexpectedly Ends FLS Policy

GBP/USD Back at Yearly High after BoE Unexpectedly Ends FLS Policy

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Bank of England ends Funding-for-Lending Scheme (FLS), a mortgage incentives program.

- Housing market no longer needs government support; rather act now than later say Governor Carney.

- Governor Carney insists not related to monetary policy, although rise in UK yields and the British Pound suggest otherwise.

The Bank of England surprised the few market participants hanging around their desks today amid the US holiday as Governor Mark Carney announced that the highly successful funding-for-lending scheme (FLS) would come to an end at the beginning of 2014.

The program, initially designed to provide cheap credit to aspiring homeowners, has exceeded expectations by helping the economy rebound above its pre-crisis levels. Now, with the housing market heating up, the BoE has been forced to withdraw its cheap credit policies for consumers. (The corporate incentives will remain for now.)

While Governor Carney said that the end of the FLS didn’t mean a shift in monetary policy or forward guidance, it is considerable that the BoE chose to essentially tighten rates in a sector of the economy that has been boosted by exceptionally low rates over the past few years. Financial stability risk is an obvious concern.

The British Pound has rallied sharply in the wake of this news, as it means that the BoE may be underestimating the pace of economic recovery, which could warrant tighter policy sooner than anticipated. Currently, the labor market is on pace to hit 7% unemployment by the 4Q’14, well-ahead of the 3Q’15 estimate provided by the BoE in its Quarterly Inflation Report earlier this month.

GBPUSD 1-minute Chart: November 28, 2013 Intraday

GBPUSD_Back_at_Yearly_High_after_BoE_Unexpectedly_Ends_FLS_Policy_body_Picture_1.png, GBP/USD Back at Yearly High after BoE Unexpectedly Ends FLS Policy

Charts Created using Marketscopeprepared by Christopher Vecchio

Following the data, the GBPUSD jumped from $1.6316 to as high as 1.6352, the exact yearly high set on the first trading day of the year, January 2. Should the GBPUSD close the week above 1.6350/55, it may be the beginnings of a more concerted push higher back into the July 2011 high seen near 1.6750.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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