Carney’s Arrival & FTSE-100 Technicals

<p>If the new Bank of England governor Mark Carney is to make any operational changes in the way the 319-year old central bank runs monetary […]</p>

If the new Bank of England governor Mark Carney is to make any operational changes in the way the 319-year old central bank runs monetary policy, he will first have to introduce an additional policy objective to the 2.0% inflation target. UK annual inflation has been above 2.0% for nearly 4 years. Despite halving inflation to 2.2% last autumn, the BoE has yet to meet its mandated target.

Forward Guidance

In comes Carney’s “forward guidance”, a set of macro economic conditions/targets used by a central bank to help it steer monetary policy. Thus, Carney may introduce growth-oriented targets, such as GDP growth, loans to the private sector, or money supply, enabling the Monetary Policy Committee to stimulate hesitant growth without focusing attention on a single price target at the expense of sacrificing vital growth.

Adding Growth

In the US, Fed Chairman Bernanke introduced the 6.5% unemployment rate as the level deemed most suitable for considering withdrawal of policy accommodation as long as inflation remains largely within he preferred 2.0% level. The Fed’s policy objectives were always known to be “maximum employment and stable prices”, with inflation preferred at around 2.0%. Bernanke’s Fed opted to quantify a preferred target for jobs as 6.5% unemployment.  In the Bank of England, its objectives make no mention to growth or jobs. The BoE’s main purposes clearly stated to be “monetary stability” and “financial stability”. Nothing about economic growth, employment or jobs is mentioned in the BoE’s strategy/objectives.

The reason markets are confident Mr. Carney will widen the policy goals is his insistence that monetary policy is far from “maxed out”. His reference to “escape velocity” for economic growth implies a higher level of growth momentum than the current ranges of -0.2% to +0.3%. UK fiscal tightening has been tempered (with the blessing of the IMF), while quantitative easing has not been increased in 13 months. Inevitably, currency traders will conclude that PM Cameron, Chancellor Osborne and governor Carney will oversee policies in support of a lower and not a higher GBP. This is more commonly known as a policy of “benign neglect”.

Carney’s big day is August 7, 2013, when the BoE releases its quarterly inflation report. We should not only anticipate the latest set of economic forecasts and sensitivity analyses with respect to price stability, but also whether a growth-oriented set of forward guidance will be introduced. Perhaps, the quarterly inflation report will become known as the “economic stability” or “inflation and growth” report. Carney will face the Treasury Parliamentary Committee that day to elucidate the contents of what promises to be a comprehensive report.

FTSE-100 appears to have stabilized at its 55-WMA following a 12% decline off its May highs. But longer-term momentum indicators suggest renewed downside is in store. We anticipate continued run-up towards the 6400-6450 resistance before summer doldrums weigh on the index for a fresh retest of the 6,000 level. A break of 6,000 level, would risk recalling the 100-DMA near 5,850, until the next wave of buying emerges in late Q4.

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.