Odds of Carney Staying on Increase, and it would be Good for the British Pound if he did say Exchange Rate Anaysts

Mark Carney

Image © European Central Bank, reproduced under CC licensing

- Carney reportedly asked to extend his term

- Stability at Bank of England seen as positive for Sterling

- Ability to provide calm leadership during market turmoil seen as downside protection for Sterling in event of any 'no deal' Brexit stresses

Governor of the Bank of England Mark Carney has reportedly been approached by the Government to stay on for another year, despite saying he would only serve six of a seven-year term.

The news is seen as having longer-term implications for the value of the British Pound which would welcome the ongoing stability and policy trajectory that his current leadership at Threadneedle Street provides.

A recent report in the London Evening Standard suggests the UK Treasury is keen for him to stay on until 2020 so that he can provide continuity during the turbulence of Brexit.

The news has seen bookies slash odds on Carney staying and he is being backed at 9/4 with Betway to remain in his position beyond June 2019.

Though widely anticipated to step aside from his role next summer at 1/3, Betway is responding to suggestions that Carney should stay on amidst post-Brexit uncertainty.

While Carney is 1/3 to be replaced next year, Andrew Bailey, whom Betway suspended betting on back in April, has been backed further into 2/5 from 4/5 for the job, followed by senior British civil servant Dave Ramsden at 100/30.

Ben Broadbent has drifted out to 13/2 from 9/2, while Jon Cunliffe, 9/1 from 7/1, has also been weak in the betting.

With Bank of England policy being a central driving force behind the British Pound there are understandably questions as to what it might mean for the value of Sterling both immediately, and longer-term, should Carney stay.

"Not that it is the main driving force for GBP, but UK rates and GBP would be indifferent / mildly supported by Carney staying on. Continuity & less policy uncertainty would be a good thing in 2019 if a 'no-deal' Brexit is avoided" says Viraj Patel, an analyst with ING Bank N.V.

The Evening Standard report notes that the Treasury is "struggling to find a candidate strong enough to replace I'm. An extension to Carney's term would be welcomed across the City."

We note there was no discernible action in the GBP exchange rate complex following the news if anything the Pound-to-Euro exchange rate falling to fresh 11-month lows at 1.1016 serves to suggest the all-consuming pressures surrounding Brexit remain in the driving seat.

Nevertheless, this is a longer-term story for the Pound we believe as should a 'no deal' Brexit be avoided the policy stance overseen by Carney's Bank of England suggests there is notable scope for a recovery in the currency.


Scope for Gains in the Pound

A second interest rate rise in the post-crisis era was delivered by the Bank of England on August 02, along with guidance that further rate rises are likely. Despite the rise in rates, Sterling actually fell.

The general rule of thumb is that a path of rising interest rates are positive for a currency; should Brexit negotiations lead to an amicable deal between the UK and EU then we would expect the Pound to play catch-up with interest rates.

We are witnessing a situation whereby the Pound is deferring strength until such a time Brexit uncertainties are removed.

"We are sticking to an optimistic view of the potential to reach an agreement. Along with support from tighter monetary policy, this will eventually result in a stronger Pound," says a note from Scandanavian lender SEB.

In short, a Brexit deal + Carney policy settings = a stronger Pound.

Should Brexit negotiations result in an amicable agreement markets would have more confidence in predicting the future trajectory of UK interest rates under a Carney governorship owing to the continuity such an outcome presents.

"Conditioned on the gently rising path of Bank Rate implied by current market yields, CPI inflation remains slightly above 2% through most of the forecast period, reaching the target in the third year... an on-going tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon," the BoE says, appearing to hint that further rate rises are in the cards over the next two years.

Analysts at ING forecast a swift recovery in Sterling during the early stages of 2019 based on the assumption a "politically acceptable" agreement covering the UK's exit from the EU is struck and markets are able to refocus on current UK economic fundamentals.

Carney has strenuously emphasised that further rate moves - both up and down - are dependent on the outcome of Brexit negotiations, confirming a prudent approach to policy that markets ultimately favour.

"For me the Carney news (if true) is Sterling positive. The currency seems to move more on clarity and stability over Brexit rather than positive or negative news. The continuity amid political uncertainty is GBP positive," says James Hughes, Chief Market Analyst at AXI Trader.

Carney is also a seasoned central banker that presided over the substantial volatility that followed the Brexit vote of 2016; his calm messaging through the crisis helped stemmed losses in Sterling on the morning following the result.

Markets will be confident in his abilities should a 'no deal' Brexit result in financial market stresses.

"Breaking away from Europe and changing the Governor of the Bank of England all in the space of three months could wreak havoc with the UK economy," says Alan Alger at Betway. “Mark Carney may well be asked to extend his stay and we go 9/4 for him to carry on beyond June, though it’s still fancied that he’ll be replaced at 1/3."

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