The low rumble of rate talk emanating from the Bank of England (BoE) has finally pushed sterling over its long-term resistance line of $1.70, with the pound rising to $1.7007 in trading on Monday.
Having repeatedly bumped along at around $1.69, comments from former BoE deputy governor Charlie Bean saying he would welcome a rate rise powered the exchange rate to a five-year high.
Profit taking rapidly pushed the exchange rate back down to $1.6977 however. Versus the euro, sterling stood at an 18-month high of €1.255.
‘As we start a new trading week, sterling has briefly pushed the 1.70 level on cable, the currency still feeling the effects of BoE governor Carney’s speech of last week, suggesting that rates may move as early as this year,’ said Simon Smith, head of research at trading platform FxPro.
In a speech at Mansion House on Thursday, Carney said that ‘the first rise in interest rates… could happen sooner than markets currently expect’. Credit Suisse on Monday bought forward its timetable for the first increase in rates from February 2015 to November 2014.
JP Morgan Private Bank head of FX strategy Sara Yates said she believed that investors may now be over-reacting to hawkish sentiment however.
‘Carney needs to convince four other members of the Monetary Policy Committee (MPC) to affect the pace of interest rates,’ said Yates.
‘During the Inflation Report press conference we were puzzled by Carney’s comment that the report was not validating any particular rate profile, because that seems to be exactly what it did.
‘We think the contradiction may be because the Inflation Report reflects the consensus within the monetary policy committee, while in the press conference Carney is freer to express his own, more hawkish view.
‘We think Carney has a lot of work to do to convince four others on the MPC of his view point, especially as he needs to convince them about intangible measures (such as the size of the output gap).’