British Pound Recovers on Carney Interest Rate Rise Warning

Sterling is higher after comments from the Bank of England - but have we witnessed a game-changer regarding the near-term outlook for the GBP?

The British pound has awakened from its slumber and taken control on comments regarding interest rates from the Bank of England.

Bank of England Governor Mark Carney has appeared before Parliament’s Treasury Select Committee and delivered a warning - the UK must prepare for higher interest rates.

As a rule of thumb - higher interest rates, and by extension expectations for higher interest rates, translate into higher exchange rates.

"The point at which interest rates may begin to rise is moving closer with the performance of the economy, consistent growth above trend, a firming in domestic costs, counter-balanced somewhat by disinflation imported from abroad," Carney told MPs.

The reaction of the pound was therefore predictable, particularly as traders had been looking for an excuse to pile back into one of the most successful currencies of 2015:

• The pound to euro exchange rate rose to its highest level since the 7th of July and is back above the 1.41 threshold.
• The pound to dollar exchange rate rose to 1.5589 confirming a base to recent losses appears to have formed at 1.54.
• The pound is also higher against the Australian, New Zealand and Canadian dollars.

“Bank of England governor Mark Carney spoke today about how the time for interest rate rises were coming for the UK, of course he would have been equally correct in stating that Christmas is coming too and we all know which we are more likely to see first,” says a rather sceptical Alastair McCaig at IG.com.

The point made by McCaig is import, while it is significant the Governor has not actually delivered a game-changing message.

Interest rates are still only likely to be delivered towards March/April 2016; we see the comments as being a mere reminder to price in a rate hike around this date.

"At his own hearing before a Treasury select committee, Governor Carney suggested that households should adjust for the ‘expectation of upward movement of rates.’ This doesn't necessarily mean that rate rises will be quick or by great margins; he added that he sees "no scenario where rates would move towards historic levels,” says Christopher Vecchio, Currency Analyst, at DailyFX.

As such we reckon further pound sterling gains against the euro in particular will be hard to come by.

The levels round 1.42 have proven notoriously hard to crack as there appears little buying momentum at these levels.