Pound, Loonie Soar as Hawkish Central Bankers Roil Markets

  • Abundance of central bank talk fuels wide currency swings
  • Euro rebounds to near 1.1400 as ECB pushback on gains muted

Why the Markets May Have Overreacted to Draghi's Comments

The pound saw its biggest gain in two months against the dollar and the euro came close to touching 1.1400 for the first time since the U.K. voted to leave the European Union, as traders sifted through the comments of top central bankers at a forum in Portugal.

Sterling rose for a sixth day, climbing as much as 1.2 percent against the dollar, after Bank of England Governor Mark Carney seemed to reverse his comments from last week by cautioning that there’s a limit to the bank’s tolerance for above-target inflation. In choppy trading, the euro rose as high as 1.1391 against the greenback as European Central Bank President Mario Draghi failed to push back on the market’s hawkish interpretation of his remarks Tuesday. The Canadian dollar also soared Wednesday after the head of that nation’s central bank reiterated that it may consider raising rates.

  • The pound rose vs all of its G-10 peers save the loonie after Carney appeared to deviate from the more-patient stance he voiced just last week. Carney said in a prepared text that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.” The statement marked a shift in emphasis from last week’s comment that it wasn’t yet the time to begin tightening. GBP rose sharply vs the dollar and other peers as traders scrambled to cover short positions. USD selling spilled over into fresh lift for EUR/USD even as EUR/GBP selling weighed, with that pair falling as much as 0.9%, its biggest drop since May 18
    • “It certainly changes the prospects for the dollar bullish sentiment if the other central banks are contemplating a tighter monetary policy,” said Minh Trang, a senior foreign exchange trader at Silicon Valley Bank
  • GBP/USD gains were slowed by offers positioned at 1.2975/80, with additional supply positioned at 1.3000, according to a trader in London familiar with the transactions who asked not to be identified because they are not authorized to speak publicly
  • EUR/USD rose to a fresh high at 1.1391, its highest since June 24, 2016, before progress was blocked by offers ahead of 1.1400. Earlier in the day, the euro fell back under 1.1300 after a report that ECB officials said the market misinterpreted Draghi’s Tuesday speech as having a hawkish tone. However, Draghi didn’t push back on the hawkish interpretation when he spoke later in Portugal
  • Earlier in the day, ECB Vice President Vitor Constancio also told CNBC that there was nothing new in Draghi’s Tuesday remarks, though traders and investors failed to take that message to heart. Stop-loss buy orders are in place above 1.1400, a second trader in London said
  • The Canadian dollar gained 1.4% vs the greenback to its strongest level since February after Bank of Canada Deputy Governor Lynn Patterson echoed Governor Poloz’s comments from Wednesday morning that the central bank may contemplate a rate hike. 
    • WTI crude oil gained as much as 1.4%, boosting commodity-sensitive CAD; U.S. data showed May pending home sales unexpectedly fell 0.8% vs estimates for a gain of 1% m/m, adding to the overall weaker USD tone
  • The ECB policy panel in Sintra, Portugal, featuring Draghi, Carney, Poloz and Bank of Japan Governor Kuroda, stuck mainly to technical discussions, with little mention of present policy trends beyond Carney’s remarks at the start of the event

— With assistance by Lananh Nguyen

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