An employee manually counts 20-pound sterling banknotes in this arranged photograph. (Photographer: Matthew Lloyd/Bloomberg) 

Mark Carney's Pulled the Rug Out from Under the Pound

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(Bloomberg Gadfly) -- Bank of England Governor Mark Carney has pulled a major prop from underneath the value of the pound by slapping a dovish line on the first interest-rate hike for a decade. 

While the currency has become the barometer of the vagaries of the Brexit negotiations, it has had the underlying comfort that when the bank turned the corner on rates a steady normalization upwards would follow. 

At the bank's quarterly press conference, Carney dashed hopes that a tightening cycle had started. An important culprit here was the notable omission in today's statement of language that appeared in policy makers' September policy decision, that rates may need to rise more than the market anticipates.

A market measure of expectations for interest rates a year from now dropped 10 basis points after his appearance, suggesting bets for only one rate hike before the end of next year. A third increase is all that is further priced in over the bank's three-year policy horizon. That would put the bank's key rate at 1 percent by the end of 2020.

The pound is now clearly at the mercy of Brexit developments. Carney was at pains to point out the "considerable risks."

Further problems in divorce negotiations could send the value of sterling back toward the bottom of the $1.20-$1.36 range seen since the referendum vote, especially if the Federal Reserve continues to raise rates. A widening gap between U.S. and U.K. benchmarks will only undermine the pound's value further.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2017 Bloomberg L.P.

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