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FUNDAMENTAL ANALYSIS

BOE Governor excites Sterling bulls​

fundamental analysis BOE excites Sterling bulls

Bank of England Governor Carney’s hawkish comment spurred sterling’s advance late yesterday that has carried into today’s activity. Sterling is within spitting distance of the $1.70 barrier and has pushed the euro below GBP0.8000. Short-sterling interest rate futures have sold off sharply. The implied rate of the March 2015 futures contract has jumped 18 bp to 1.13%.

ECB officials have been highlighting the divergence between its monetary stance and the UK and US stances. Carney’s confirmation of what we have been arguing, namely that the first rate hike is likely prior to when the BOE has been signaling, drives home the ECB’s point, at least in part. Next week’s FOMC meeting is unlikely to signal that the Federal Reserve is prepared to match the BOE.

Chancellor of the Exchequer Osborne also had some surprises in his Mansion House speech. He gave the BOE, through the Financial Policy Committee, which meets next week, direct authority, as opposed to consultative powers, regarding macroprudential steps involving curbs on loan-to-value and loan-to-income. Recall former Governor King refused such powers because of the political nature of such judgments.

In fairness, Carney made other comments that mitigated in part his hawkishness, such his assessment of the economic slack and the headwinds posed by sterling’s strength. Recent data, including today’s construction spending report (April 1.2% vs. consensus of 1.5%) does not show the UK economy accelerating, but rather maintaining a robust expansion. Nevertheless, his warning that the first hike could take place sooner than the markets had expected is being understood as the main message and likely signals that the minutes of this month’s BOE meeting, out next week, may show a more heated discussion.

After sliding lower in the first half of the week, the euro found bids in front of $1.35 and has extended yesterday’s recovery today. It barely poked into an important band of resistance seen in the $1.3575-$1.3620 range before running out of steam in the European morning. The softer than expected US retail sales report followed by a strong 30-year Treasury auction that saw US 10-year yields tumble back below 2.6% sparked the euro’s recovery.

The Bank of Japan’s two-day meeting ended and, as widely expected, there was no change in policy nor economic assessment. The policy signal that did emanate from Tokyo was the confirmation that the government will move to begin cutting corporate taxes starting next year. It is true that Japan’s corporate tax schedule rate at 35% is among the highest in the OECD.

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