Pound Rises After Carney Says Rate Hikes Could Still Happen

(Bloomberg) -- The pound recovered to snap five days of losses after Bank of England Governor Mark Carney said markets should keep the prospect of further interest-rate increases on the table.

Sterling had dipped after the central bank warned of rising economic harm from Brexit and cut its U.K. growth forecast to 1.2 percent for this year, from 1.7 percent previously. But the currency soon reversed and gilts pared gains as Carney struck a slightly more upbeat tone in his press conference, saying markets shouldn’t prepare for a scenario without rate hikes.

“When hope prevails, the market buys the dip,” said Manuel Oliveri, a currency strategist at Credit Agricole SA. “The BOE reiterated that the economy may rebound should there be a soft Brexit,” he added, referring to a scenario where a Brexit deal is reached.

Hedge funds cut their short positions as the currency began to rebound, said a currency trader, who asked not to be identified as they were not authorized to speak publicly.

Pound Rises After Carney Says Rate Hikes Could Still Happen

Sterling climbed 0.3 percent to $1.2975 by 3:00 p.m. in London, having touched $1.2854, the lowest level since Jan. 21. Ten-year gilt yields rebounded from a two-month low, but were still down four basis points at 1.18 percent. Traders in money markets are now only pricing a 65 percent chance of a rate hike by June 2020, versus 75 percent Wednesday.

Now that the central bank’s first meeting of the year is out of the way, traders’ attention will turn back to Brexit and whether Prime Minister Theresa May can secure any concessions from the European Union over the Irish border. Brexit Secretary Steve Barclay will meet the EU’s chief negotiator, Michel Barnier, at the European Parliament in Strasbourg on Monday.

BOE analysis showed that a reduction in uncertainty would lead to much stronger growth -- 1.6 percent this year and 2.2 percent in 2020. The central bank’s guidance and long-term forecasts show that it still wants to hike rates, according to Citigroup Inc.

“Brexit developments and global considerations are back in the driver’s seat for sterling, suggesting broader trading ranges seem likely to prevail until more clarity emerges on the political front,” wrote Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank. “Unless fresh bearish catalysts emerge, we think cable may gravitate above $1.30 in the days ahead.”

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