GBP in focus as Carney hints at possible BoE rate hike

Another day in Europe is coming to an end, and those who like volatility were not left disappointed with the euro and pound making sharp moves as speculators responded to fresh rumours and comments from central bank officials.

Another day in Europe is coming to an end, and those who like volatility were not left disappointed with the euro and pound making sharp moves as speculators responded to fresh rumours and comments from central bank officials. The single currency surged higher yesterday after the ECB President Mario Draghi said the threat of deflation in the Eurozone had gone and “reflationary forces are at play." Well, earlier today, the euro dropped back as the ECB said the market had misjudged Draghi’s speech on stimulus. Nevertheless, the EUR/USD was quick to rebound as the US dollar remained downbeat. But the single currency did weaken against the commodity currencies and the pound. The latter jumped after Mark Carney, Governor of Bank of England, said that if the jobs market remains healthy and unemployment low then the MPC’s “tolerance for above-target inflation falls,” which is another way of saying the BoE will tighten its policy if they are proven wrong on their inflation forecasts for a bit longer. Carney even explicitly said that “some removal of monetary stimulus is likely to become necessary” if business conditions improve further and wages rise.

The impact of hawkish comments from the BoE and dovish remarks from the ECB weighed heavily on the EUR/GBP. While this pair may now fall further, we prefer to play GBP’s strength against the Swiss franc, for the SNB is more dovish than the ECB, and the EUR/CHF pair has been rising in recent days. Thus, the GBP/CHF could be about to stage a more meaningful comeback than the GBP/EUR (i.e. EUR/GBP inverted). Indeed, the GBP/CHF has formed a potential reversal signal in the form of a bullish engulfing candle on it daily chart. We are now on the lookout for the dips to be supported in the short-term, especially around the broken resistance area of 1.2360-1.2400. If this area holds as support then we may see price head towards the Fibonacci levels shown on the chart, with our main short-term target being around old support and the 61.8% retracement level at 1.2735-1.2755.

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.