Pound Slides to Two-Month Low on Dovish Carney, S&P Ratings Talk

  • Brexit concerns outweigh rising inflation for BOE Governor
  • S&P says may review U.K. rating before Brexit talks conclude

BOE's Carney Says Not Yet Time to Raise Rates

The pound extended losses to reach a two-month low against the dollar, triggered by Bank of England Governor Mark Carney signaling he wasn’t in a hurry to raise interest rates any time soon because of worries about the impact Brexit will have on the U.K. economy.

The decline in sterling was exacerbated after S&P Global Ratings’ chief rating officer Moritz Kraemer said that they “don’t have to wait” until the end of the Brexit talks to review the U.K.’s credit standing. The European Union’s chief Brexit negotiator Michel Barnier said the U.K. has confirmed it intends to leave the bloc’s single market. The British currency also struggled against a broadly stronger dollar, which was buoyed by hawkish comments from Federal Reserve policy maker William Dudley.

Sterling weakened against all of its Group-of-10 peers, and gilt yields declined as Carney said that domestic inflation pressures remain subdued. Speaking at London’s Mansion House on Tuesday, he also highlighted the weakness in the economy and the increased uncertainty as the nation formally starts talks to exit the EU.

Carney’s comments were seen as pushing back against a hawkish shift at last week’s Monetary Policy Committee meeting, where three members unexpectedly voted to raise the benchmark rate from a record-low 0.25 percent. That split in the MPC is intensifying the uncertainty faced by pound traders as the U.K. begins its Brexit negotiations in the wake of inconclusive elections earlier this month.

  • For many observers, two more dissents than the previous meeting meant “a rate hike is getting closer. Carney set the record straight earlier today, and sterling fell half a cent in response,” say analysts at Brown Brothers Harriman, led by global head of currency strategy Marc Chandler
    • “As he was a year ago, Carney remains concerned about the economic consequences of Brexit. The takeaway is that the BOE is most likely not going to raise rates anytime soon. The market responded immediately and began unwinding the tightening bets,” they write in a client note
  • GBP/USD falls 0.9% to 1.2618, after reaching 1.2604, below the election result day low of 1.2636 and the weakest since April 18, when the snap election was called
  • Carney warned of the need for firms on both sides on the negotiations to look into contingency plans as talks advance
    • He also renewed his warnings about Britain’s current-account deficit, saying that its sustainability “remains an open question” even after the pound’s depreciation
  • Yield on 10-year gilts drops 4bps to 0.99%
    • MPC-dated SONIAs shift to price ~47% chance of a 25bps hike by end of 2018, compared with around 77% ahead of comments
  • S&P’s Kraemer says the ratings company is watching the currency, economic data and implications of the Brexit process on the U.K.’s public finances and constitution
    • “First of all, it’s not certain that March 2019 will be the end. There might be a transition period negotiated. We will review the U.K. like any other sovereign at least every six months and if necessary more often,” he says
  • Barnier says the U.K. confirmed on Monday it intends to leave the single market and the customs union; there may be a need for transitional periods, he says
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