Do not accuse Mark Carney of being a currency manipulator (anymore).
True, the Governor of the Bank of England has something to answer for. He announced a rate cut in August 201
Now they talk to each other again. The BoE is sure to raise its key interest rate on Thursday's monetary policy decision by 25 basis points to 0.75 percent. That should give the currency the support it has painfully missed, and not just because of the recent Brexit-induced political turmoil. Carney's key interest rate hike in May, after first-quarter economic data was weaker than expected, gave traders the idea that the bank's rise in November was a story of "one-and-one" rather than one ( very) could be gradual tightening phase.
But for the pound, one friend is not enough, and it probably will not look any different soon. The spread of the last two months, between 1.30 and 1.34 to the dollar, is likely to continue for some time.
When the bank was finally finished getting cold feet, finally raise rates above 0.5 percent – as in May – the speech of Deputy Governor Ben Broadbent on 23 July was the last chance to send a signal. And it sent no one.
Market expectations for a rate hike this week are now at 90 percent. If officials did not vote for change at the time, the credibility of the Monetary Policy Committee would be rather shaken by investors. This can not be completely ruled out, with some 20 percent of economists remaining at current levels in a Bloomberg News poll.
But as soon as a rate hike comes, traders look to smoke when the next one is due. Fortunately, the bank will help you. The BOE will unveil a brilliant new measure that will combine all elements of its forward rate guidance into one measure: the neutral interest rate or, in central bank librarianship, r-star (r *).
R * shows Where the MPC believes interest rates have to calm during the three-year forecasting period, the economy is balanced – neither too hot nor too cold. This Goldilocks level defines what the bank's "limited but gradual" guideline actually means.
The BOE has already prepared expectations for 1.5 percent, as this, according to the official level, must reach interest rates before they can begin to settle the bonds purchases – otherwise they would act too soon and the economy would be unable to manage something.
Analysts give a forecast range for r *. Dan Hanson of Bloomberg Economics expects a first estimate of the neutral rate of about 1.5 to 1.75 percent. If the bank's estimate lands in this environment, it would mean that policymakers expect interest rates to rise three to four times before summer 2021. This is in line with current market expectations, making it unlikely to weaken the pound sterling.
Others see the Bank's first estimate of Hanson's reach. If it lands at 2 percent or even higher, that would mean that the bank expects interest rates to rise faster than the current forecast of one to two rate hikes a year. That would be safe to light a fire under sterling.
But the fire would not be a strong one. First of all, the BOE has not won the argument for the long-term price course. The Sterling Overnight Index Average (Sonia) curve shows that investors will not see a second rate hike within three years.
Anyway, it's hard to see how the bank recovers interest rates before Brexit May increase at the end of March. Political insecurity is acute, not to mention recent economic data that has been disappointing.
Another catch is the dollar. Although the recent chaos in Prime Minister Theresa May's cabinet has damaged the pound, I have argued that the currency's recent weakness was essentially a history of dollar strength. Aside from any other source of confusion in Washington, there is a reasonable reason to expect the greenback to continue to rise. The US Federal Reserve narrowed investor expectations for a gradual rate hike, including one or two additional steps this year. This position was confirmed on Friday with a report that gross domestic product growth exceeded 4 percent in the second quarter.
With a second UK rate hike in its pocket on Thursday, the BOE will again enter a rate hike cycle and the pound will have at least one floor. The Brexit and the dollar will prevent the pound from running away. A party of one is not a lot of fun.
( Updated rate expectation in sixth paragraph. )
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
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Jennifer Ryan at jryan13 @ Bloomberg. Network