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GBP/USD Pushes Higher While FPC Minutes and Carney Fail to Surprise

GBP/USD Pushes Higher While FPC Minutes and Carney Fail to Surprise

Oded Shimoni, Junior Currency Analyst


Talking Points:

- The FPC reduced the countercyclical capital buffer from 0.5% to 0% of banks’ UK exposures by a unanimous decision

- Some of the risks to financial stability from the referendum had begun to crystallise

- Carney stresses that credit growth will be a matter of demand not supply

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The British Pound traded higher versus the US Dollar while today’s main “Brexit” related risk events passed without major surprises; the BoE’s Financial Policy Committee (FPC) meeting record reiterated points from the latest Financial Stability Report, while the Carney testimony to parliament didn’t seem to provide substantial clues on future monetary policy.

Looking into the FPC minutes, the committee said that risks to financial stability from the referendum had begun to crystallise. The FPC recognised that there would be a period of uncertainty and adjustment following the result of the referendum, and have highlighted the following risks for close monitoring:

  • Further deterioration in investor appetite for UK assets- A sudden shift in the supply of foreign capital and in the current account deficit would be associated with a sharp increase in risk premia, adjustment in sterling and tighter funding conditions for UK borrowers.
  • Adjustments in commercial real estate markets
  • Increasing numbers of vulnerable households and pro-cyclical behavior of buy-to-let investors
  • The outlook for the global economy- in particular the rapid credit growth in China which could spill over to other EMEs. A prolonged period of uncertainty associated with Brexit could affect the global economy, particularly the Euro-Zone. Major UK banks’ exposure to the euro area amounted to around 200% of their core equity capital.
  • Reduced and fragile liquidity in core financial markets

The Committee cut the countercyclical buffer rate from 0.5% to 0% by a unanimous decision in order to reduce pressure on banks to tighten credit conditions.

In the following testimony to the Treasury Select Committee, Carney and the FPC members discussed the report. Traders might have been waiting for possible hints “slipping” on future monetary policy; an expectation that quickly evaporated.

The few comments about monetary policy measures seemed to have added little information to what was already revealed by Carney in the past.

Carney did say the MPC has the tools needed to fulfil their responsibilities, and that there always could be a monetary response.

The BoE Governor reflected that in his view the record low bond yields do not represent 30 years of stagnation, rather a hedge on downside risks.

The British Pound level is seen as reflecting investor perception of risks and "is helping" in these circumstances. The decline can help UK economic adjustments and improve current the account deficit.

Carney discussed the reduction in the countercyclical buffer and said that UK banks had balance sheet capacity even before the "Brexit" vote, but the reduction in the buffer will add to it. With that said, Credit growth will depend on credit demand, not supply, and the reduction to the buffer was aimed to ease credit supply concerns by the market.

On possible contagion issues from the Brexit vote to the Euro-Zone, Carney said that there might be a potential slowdown in the Euro-Zone's economy which could signal a tighter risk environment and a challenge to economic conditions. The Governor said that UK banks direct exposure to Italian banks is less the 1%, while direct exposure to the Italian economy is quite modest.

GBP/USD 5-Minute Chart: July 12, 2016

--- Written by Oded Shimoni, Junior Currency Analyst for

To contact Oded Shimoni, e-mail

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.