Not long to go now before we hear from Mark ” Gorgeous George” Carney as he attempts to assure the nation and other interested parties that he’s got it all under control. Really.
His arrival at Threadneedle Street was marked by his desire to implement a forward guidance that showed he was fully in control of the situation and interest rates would remain low for a while but that a drop in unemployment to at least 7% and a steady rate of inflation would signal a hike. His statement took markets by surprise given that it accompanied the MPC decision and caused a good degree of carnage.
Well a few months have passed, the unemployment rate is lower at 7.1%, data is generally better but wobbling as 2014 gets underway and Mr Carney has found himself with an unwelcome decision to make. Does he lose face amongst the market community and indeed his own MPC team and revise or implement a “second stage” to his forward guidance ( probably a drop in jobless rate to 6.5%) or stick to his guns but continue to warn that interest rates will stay low.
I and others have long argued that a rate hike any time soon ( like the mid to end 2015) would have catastrophic results on any recovery and Mr C is heeding that advice, but markets don’t like uncertainty so will want to hear something a little more concrete today.
Higher interest rates generally mean a stronger currency on yield terms but it also threatens the very recovery that is underway. There have been a lot of GBP buyers around lately so we must assume the jury is still out if they are content that interest rates are remaining low well into 2015. If my argument holds any credence then perversely GBP could rise further on that basis given that it would give the recovery more chance of laying down some roots thus rendering the severe household debt problem less of an issue.
And that’s the bit I’m finding a little confusing right now. What exactly are investors looking at ? And talking of investors don’t forget that there is an underlying potential need to buy GBPUSD around for the Vodafone/Verizon deal that I highlighted previously.
So it’s a muddy picture that sits before us at the moment, but don’t worry I haven’t lost my bear coat. Just saying, as always, that there’s two sides to the argument and now as much as any time in recent memory.
And that’s why Carney must keep his cool and clarify to not cause further carnage and confusion, despite that scenario presenting us with a few trading opportunties in the short term.
