Pound Resuming Ascent Shows Limits of Carney's Dovish Talk

  • Sterling posts weekly gains versus the dollar and euro
  • Pound strongest since August against euro after Draghi QE view

The pound posted weekly gains versus the dollar and euro, a move that may prompt the Bank of England to step up its dovish rhetoric.

Sterling had its biggest weekly advance against the U.S. currency in two months. It approached its strongest level since August against the euro after European Central Bank President Mario Draghi Thursday kept the prospects of more stimulus alive in the face of low inflation and faltering economic growth.

A stronger currency is a challenge for the U.K. because it makes the economy less competitive. It lands BOE policy makers led by Governor Mark Carney with the tough task of finding a balance between signaling higher interest rates and reining in the pound.

“Sterling was a big theme last week” in the BOE Inflation Report, said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. “Carney presented the view that they could still hike in 2016 but with a very dovish tone. I do think it’s because he is watching euro-sterling closely in particular.”

The pound appreciated 0.7 percent to 70.52 pence per euro as of 5 p.m. London time, extending this week’s gain to 1.2 percent. It touched 70.41 pence on Thursday, its strongest level since Aug. 19. Sterling fell 0.2 percent to $1.5208, paring its weekly advance to 1 percent, still the biggest versus the dollar since Sept. 11.

Dovish BOE

Carney dealt a blow to sterling bulls on Nov. 5 by signaling that the BOE isn’t yet ready for tighter policy. Federal Reserve policy makers said on Thursday that the interest-rate path will be gradual, further delaying prospects of a move by the U.K. central bank. Forward contracts based on the sterling overnight index average, or Sonia, indicate that a full quarter-point boost to the BOE’s main rate won’t come until January 2017.

BOE Chief Economist Andrew Haldane was the latest policy maker to temper views on the central bank raising interest rates. He said Thursday that tighter policy would extend “the period inflation remains below target” and unnecessarily hinder economic growth.

Data due Nov. 17 will show that U.K. inflation held below zero in October at an annual rate of minus 0.1 percent, according to a Bloomberg survey of economists. This will further strengthen the case for the BOE to maintain an accommodative policy stance for longer.

“We see little scope of central bank members turning less dovish anytime soon,” analysts at Credit Agricole SA’s corporate and investment-banking unit, including London-based head of Group-of-10 currency research Valentin Marinov, wrote in a note to clients.

While global growth prospects remain uncertain and “the BOE remains cautious regarding a stronger currency’s dampening impact on price developments” investors have only limited expectations of a tighter policy, they wrote.

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