BOE Surprises in Word not Deed

Mark Carney's presence at the Bank of England was felt immediately.  Although the MPC did not change policy, it did issue a statement and that markets reacted to it by taking sterling sharply lower, against both the dollar and euro, and fueling a rally in the short-sterling futures strip.  

While warning of near-term upside risks to inflation and acknowledging some recently better data, the MPC warned that backing up of market rates was weighing on the outlook.  Most importantly, it stated that the implied curve was not warranted by the latest developments.  This was a protest of the increase in short-term interest rates seen in recent weeks.  It is not exactly forward guidance, but seems to be a close relative.  

Sterling, which had rallied yesterday (to a high just above $1.5300), has now been sold off to new lows since late May against the US dollar,  hitting $1.5075. Sterling is flirting with the trend line drawn off the year's low in mid-March and late May.  It comes in near $1.5100.  The next key technical support is near $1.50.  

For its part, the euro, which had fallen to almost GBP0.8480 yesterday, rallied back and broke above the GBP0.8600 nemesis for the first time since mid-April, though has not finished the North American session above it since mid-March.  Despite the intra-day move above GBP0.8600, it is not clear that this really signals a break out.  A close today and/or tomorrow above  there may be more telling from a technical perspective.  

The benchmark 10-year gilt yield fell about 5 bp, while the implied yield on the short-sterling futures contracts fell around 3-6 bp for this year, 8-13 bp for next year and 14-17 bp for 2015 contracts.   

First impressions count and the market's first impression is unlikely to disappoint Carney or Osborne.  Carney's appointment is part of a process that will lead to a remaking of the BOE, with a new mandate evolving and two new deputies in the coming months.