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Pound Falls Off a Cliff, But Bounces Back as Carney Calms Brexit Fears

Pound Falls Off a Cliff, But Bounces Back as Carney Calms Brexit Fears

2016-10-25 18:03:00
Oliver Morrison, Analyst
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Talking Points

  • The Pound dropped suddenly to a two-week low before Mark Carney’s appearance in Parliament
  • The abrupt decline helped FTSE claw back Monday’s losses
  • Sterling went on to rebound during the Bank of England Governor’s testimony
  • Carney says the UK’s EU exit will be “orderly” and takes a swipe at the markets’ perception of events

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Volatility was expected, and it’s volatility we got. The Pound dropped below 1.2200 on Tuesday afternoon to as low as 1.2084, its lowest level in two weeks, ahead of Bank of England Governor Mark Carney's appearance before the House of Lords in Britain’s Parliament, where he was to be quizzed by lawmakers about Brexit.

The abrupt tumble from the currency helped the FTSE 100 reverse all of Monday’s losses to trade back above 7,050. Yet that lever faded when the Pound went on to recover during Carney’s testimony, where he insisted the UK’s EU exit would be “orderly”. The FTSE in turn came off highs that had at one point seen the market up nearly 1.2 percent on the day. GBP/USD is currently trading at around 1.2135, still down on the day's best rate of 1.2244.

GBP/USD daily chart

Pound Falls Off a Cliff, But Bounces Back as Carney Calms Brexit Fears

Chart prepared by Oliver Morrison using TradingView on DailyFX.com

Carney attempted to assuage Brexit fears in his comments to a committee of lawmakers. “Sterling starts to really move as it becomes clear the timing of the Article 50 triggering, and the market’s perception, and I really underscore it’s the markets perception, of what the potential relationship will be between the United Kingdom and Europe,” he told them.

He added on making forecasts: “It’s a bit early to be making those determinations because the Prime Minister has been very clear that it will pursue an orderly Brexit, that we’ll get the best deal possible, that there have been no negotiations thus far, there’s no running commentary on specifics, so it is a perception of the market, but it is a perception they have made.”

What exactly caused Sterling’s woes is unclear but it may have been comments by British Chancellor Phillip Hammond. He said that further Sterling devaluation would impact inflation expectations. He added he “cannot imagine rejecting the Bank of England’s bond-buying program.”

The comments were interpreted as dovish, paving the way for further easing and currency devaluation.

Was the sell-off down to Dollar strength or Pound weakness? The Greenback is buoyant this week, with the Dollar index at its highest since early February as investors anticipate a 71% chance of a Federal Reserve rate hike at its December meeting.

But the Dollar rally stalled itself on Tuesday as US consumer confidence data published by the Conference Board missed expectations. The October reading fell back to 98.6, according to the report, from 103.5 in September – which was a nine-year high. Analysts had forecast a drop to 101.0 in October.

The Dollar was looking for another chance to rally on a speech later by Dennis Lockhart, the Atlanta Federal Reserve Bank President. However, the non-voting central banker avoided discussion of monetary policy or economic forecast.

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

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