by Dave Evans of binary.com
If Carney is the Unreliable Boyfriend…
In one of the more memorable quotes of the year, Labour MP Pat McFadden described Bank of England Governor Mark Carney as behaving like an “unreliable boyfriend”. This came after Carney’s slightly dovish speech on the timing of interest rate rises in the middle of the week.
This sent Cable (GBP/ USD) into a short term sell off as traders fought to adjust their positions over fears they had overstepped the mark with bullish bets on UK interest rates and therefore the British pound.
Carney’s week: GBP/ USD Hourly Chart
Thursday’s Financial Stability Report (FSB) redressed the balance somewhat, with Cable rising in reaction. The general view across the markets is that Carney and the MPC could have gone much further with the macro prudential activities – with the new rules effectively capping activity at current levels rather than forcing a more immediate turnaround.
Regardless, the interpretation from traders is that the new rules will not equate to a delay in hiking rates, or to put in bluntly, interest rates will have to take up the slack from a benign FSB.
All bets are therefore back on for a late 2014 rate hike, but what happens from there is still anyone’s guess. Traders have grown increasingly frustrated by Carney’s apparent flip flopping on rates, but if Carney is the unreliable boyfriend, financial markets are guilty of setting unrealistic expectations.
The Bank of England deals in probabilities while traders are human and humans crave certainty. Traders and their algorithms react to absolutes not nuances of emphasis. Carney caused a stir with his Mansion House speech when he said that a rate hike “could happen sooner than markets currently expect”, but many ignored the next sentence “But to be clear, the MPC has no pre-set course. The ultimate decision will be data-driven”.
Another area of conflict is the MPC’s suggestion that the date of the first rate hike is less important than the trajectory of subsequent activities. This misses the psychological impact that a rate hike of any form will have on the man on the street. It’s not too much to imagine alarmist rate hike headlines such as “interest rates could hit 6%” on the back of a small first step. Financial markets aren’t rational and neither are human beings.
In this environment, about the only thing we can predict with any probability is further volatility. The Bank of England effectively left a lot of its heavy weapons in the locker, hoping that the threat of further activities and interest rate hikes would be enough to cool the booming housing market.
It is a very fine balancing act and one of the reasons why the MPC was not bolder than it could have been. The London housing boom may already be letting other areas take up the baton, and anecdotally, asking prices appear to be coming back to some level of normality . Estate agents talk of finally making money outside of London after subsidising outer regions with London boom money.
Carney et al need to allow time for this housing inspired boom to seep through the entire country and indeed the economy without deflating the whole thing and triggering another recession. As such, we are likely to see more back and forth between the MPC and markets in the coming months.
GBP/ USD Daily Chart
A good way to play this is an IN/ OUT trade that the GBP/ USD will close between 1.7200 and 1.6900 in 45 days time, for a potential return of 113%.
Although the consistent rate speculation could see some short term volatility, this could ironically cause the GBP/ USD to make very little progress over the next month and a half.
While the British pound could be heading for more indecision, the NZD/ USD continues to head higher – near record highs in fact.
With the China boom not busting (yet) and the global economy generally easing, there could be more upside here for the NZD/ USD. A good way to play this is a HIGHER trade predicting that the NZD/ USD closes higher than 0.8800 in 31 days time, for a potential return of 157%.
This means you are predicting that the NZD/ USD will rise from here and close above the 0.8800 trigger level when the bet expires in 31 days.
Disclaimer: This trading guide is intended for educational and information purposes only. They should not be construed as giving investment advice and you should not rely on any content within these guides in making or refraining from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.