Fundamental Forecast for GBP: Neutral

For the British Pound, last week was dominated by comments from Bank of England Governor Mark Carney, whose remark that “some removal of monetary stimulus is likely to become necessary” was interpreted as bringing closer an increase in UK interest rates.

What took the markets by surprise was that just the week before a speech by him was interpreted as being dovish. And to add to the confusion there were comments from the central bank’s chief economist in between, which appeared to contradict his boss’s first statement. In fact, as so often with central bankers, the explanation could be that Carney used rather careful language that some market analysts oversimplified.

He actually said that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC [the bank’s monetary policy committee] continues to lessen and the policy decision accordingly becomes more conventional.”

The trade-off he was talking about was presumably the one between slow growth and high inflation, which makes UK monetary policy decisions particularly difficult. So essentially he was saying only that if growth picks up and inflation fails to come down a decision to raise rates will become easier. If the markets were to begin to understand that and reinterpret Carney’s comments, it’s quite possible that the Pound will ease back again after the gains it made in their wake.It’s also important to note that the 1.3000 to 1.3030 level has proved to be strong resistance for GBPUSD.

Chart: GBPUSD Daily Timeframe (2017 to Date)