GBP/USD– Will BoE Governor Mark Carney scare sterling bulls?

Weekly Outlook

GBP/USD– Will BoE Governor Mark Carney scare sterling bulls?, Monday 26 August:

At the annual Jackson Hole symposium the Bank of England Deputy Governor Charlie Bean clarified the intention behind the extraordinary forward guidance was to boost confidence among consumers by limiting uncertainty until a sustainable recovery is apparent. Bean added that “it should reduce the likelihood that the present expansionary monetary stance is withdrawn prematurely through an upward movement in market interest rates.” The UK central bank’s number two additionally clarified that the BoE’s base interest rated was unlikely to be raised until late 2016 with reducing unemployment figures the main criteria.

The conference of policymakers and academia did not provide further transparency as to the timing of tapering, yet a paper by Arvind Krishnamurthy emphasized that the Fed’s purchases of stressed assets like MBS stimulates the economy more than buying of government bonds. That started a debate as to whether the curbing of quantitative easing should first start with reducing the $45 billion of Treasury purchases. However, the head of the IMF Christine Lagarde urged tapering caution as she believes "unconventional monetary policy is still needed in all places it is being used, albeit longer for some than for others.' Ms Lagarde said that any withdrawal of stimulus should be determined by the separate economies in order for a durable growth.

US Durable Goods for July showed a deteriorating outlook in manufacturing, with a plummet of 7.3 percent significantly short of expectations for a drop of 3.0 percent. The consensus range was from a plunge of 7.2 percent to an increase of 1.4 percent and the actual issue was below even the gloomiest forecasts. The previous release was revised down to a rise of 3.9 percent from the initial estimate of 4.2 percent. This was the deepest decline since last August’s report. Core Durable Goods, which exclude volatile aircraft orders, showed a fall of 0.6 percent, well below of analysts’ estimates for growth of 0.6 percent. The number less defence goods nosedived by 6.7 percent, whereas pundits were forecasting a moderate decline of 2.6 percent after the prior rise of 2.9 percent.

Tomorrow will provide the first hint if US consumption has peaked with the release of the CB’s Consumer Confidence Index for August due out at 15.00 BST. Expectations are showing wide variation, ranging from 74.8 to 80.0, yet they have a more negative bias compared to the consensus of 78.0. The prior figure of 80.3 fell from June’s 68-month high. The indicator is widely anticipated each month, being both a leading indicator of US consumption and for the greenback. However the mild decline in July’s Consumer Confidence was followed by a worse-than-expected preliminary reading of University of Michigan Consumer Sentiment which dropped to its lowest level since April. The official UoM index is due out this Friday at 14.55 BST and pundits forecast an increase to 80.5 from the first estimate of 80.0. The Bloomberg Consumer Comfort Index, Gallup’s Economic Confidence Index and Rasmussen Consumer Index all support the theme of peaked consumer sentiment in the US, which is now beginning to turn as a result of elevated gasoline prices and growth in mortgage rates.

The most important event this week for sterling is Wednesday’s appearance in front of media of Bank of England governor Mark Carney at 12.45 BST in Nottingham. Volatility is likely to surge around the speech and analysts expect Carney to reiterate the BoE stance of keeping rates at record low. The former Bank of Canada governor has been a pioneer of forward guidance with the promise in 2009 to hold borrowing costs in the North American country for more than a year, an action credited as helping Canada to weather the financial crisis better than most.

Mark Carney used to be an investment banker in Goldman Sachs trading sovereign bonds and he must have recognized the need to calm the gilts, with yields surging to 2-year highs even surpassing the rally in US 10-year yields. Barclays believes Mark Carney as a specialist in managing market expectations ‘’will need to remind the market that it is focused on the unemployment rate, and unless the rate starts to decline, improvements in other cyclical data should not be reflected in steeper rates.’’ The BoE governor described his biggest fear in the forward guidance announcement is that ‘’as the recovery gathers pace, there is an unwarranted expectation about the pace of the withdrawal monetary policy stimulus.’’ Analysts from Barclays favour owning shorts ahead of the central banker speech as despite the disappointing Durable Goods data from the US the pound could not hold on to the gains.

Following the BoE governor press conference, the US Pending Home Sales for July will be released at 15.00 BST. Economists expect the decline to accelerate to 1.0 percent after June’s drop of 0.4 percent and the lowest reading in 9 months of New Home Sales last week.

In the US, Thursday will be marked by the issue of the second estimate of GDP for Q2 reported together with initial jobless claims at 13.30 BST. Expectations are for economic output to progress by 2.3 percent after the initial projection of 1.7. However the GDP Deflator is forecasted to increase by 0.7 percent identical as the first estimate. After last week’s disappointing release of 336,000 Unemployment Claims, Wall Street estimates a decline by 7 thousand in the week until 23 August.

The pound market awaits the UK GFK Consumer Confidence for August, due to be released at 00.01 BST on Friday. The consensus is for improvement to a new post-recession high of -14 from -16 in July.

The last day of the week also sees Personal Income and Outlays due out at 13.30 BST. Although personal spending and income are expected to decrease marginally, the Core PCE Index is forecasted to show an advance to 1.3 percent from 1.2 percent. Later in Friday’s afternoon at 14.55 BST will be reported Chicago’s PMI for August, with analysts’ estimate for an improvement to 53.0 from 52.3 in July.

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