Pound Rallies From Lowest Since Flash Crash on Carney Testimony

  • BOE chief addressed House of Lords on impact of Brexit vote
  • His inflation comments mean further easing unlikely: Manulife

Carney: BOE's Not Indifferent to Moves of the Pound

The pound recovered from its lowest level since the flash crash earlier this month after Bank of England Governor Mark Carney said there were limits to officials’ willingness to look beyond an overshoot of their inflation target.

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Carney’s testimony to the House of Lords on the economic consequences of the Brexit vote suggested to some traders that looser policy isn’t a given, and helped sterling pare its daily slide. The pound, which had tumbled before his address, also rallied as the BOE chief sought to downplay the impact of the bank’s stimulus measures on the currency.

“The comments by Carney do highlight that the latest sterling selloff is starting to worry policy makers as it brings closer the risk of stagflation,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate- and investment-banking unit in London. “The BOE will be anxious to avoid such a scenario given that soaring inflation on the back of sterling depreciation would limit severely their ability to respond to future shocks.”

Sterling has been under increasing pressure from the June 23 vote to leave the European Union, and was undermined further after Scottish First Minister Nicola Sturgeon met with premier Theresa May on Monday, only to say that the U.K. government didn’t appear to have a strategy for negotiating with its continental partners. The mounting prospect of a Federal Reserve interest-rate increase is also weighing on the pound, which has fallen 18 percent since the referendum.

Even after recovering, the pound was down 0.4 percent at $1.2186 as of 6:05 p.m. in London. It tumbled 1.3 percent earlier to the lowest since Oct. 7.

Carney’s testimony to the House of Lords means “further easing is unlikely in the near term,” said Chris Chapman, a trader at Manulife Asset Management (Europe) Ltd. in London.

The biggest worry for currency investors is the prospect of a so-called hard Brexit, and a poll by Survation Ltd. on Tuesday showed that Britons are more concerned with controlling immigration than maintaining access to the single market. Carney told the Lords that the recent sterling weakness has been driven more by market perceptions of Brexit scenarios than monetary policy.

“At this point, it’s Brexit and political wrangling that’s driving pricing for the pound,” said Peter Rosenstreich, head of market analysis at Swissquote Bank SA in Gland, Switzerland.

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