The British pound slipped against the dollar on Thursday after Bank of England Governor Mark Carney took markets by surprise by voicing a more negative view on the UK economy. The dollar rose alongside equities as commodities fell in a massive relief rally after US President Trump de-escalated tensions with Iran.
GBP/USD was lower by 62 pips (-0.48%) to 1.3038 as of 1pm GMT, taking the currency pair to fresh lows for the week.
The dollar
In a press conference yesterday morning in Washington, President Trump said it appeared Iran was “standing down” after its missile attack on a US base in Iraq. The US opted to de-escalate tensions by imposing more economic tariffs on Iran rather than military action. The aversion of a new war in the Middle East was welcomed across markets with US stocks hitting record highs. The dollar lost out against riskier currencies but gained against the pound and the Japanese yen, which is typically less in demand when investors are more willing to take risk.
The pound
The British pound was one of worst-performing currencies on Thursday, especially considering the positive mood brought about by falling geopolitical tensions in the Middle East. The Sterling weakness was almost entirely in response to the dovish comments made by the outgoing Bank of England governor during a speech at a conference in London. Whist many economic commentators had turned more optimistic on the UK economy after last month’s decisive election result, Carney took today’s speech as an opportunity to highlight the risks.
Governor Carney’s specific concern relates to the lack of space for the central bank to cut interest rates in case the economy does not improve this year. Interest rates have been kept near record lows through Carney’s six-and-a-half-year tenure as BOE Governor. As a result Carney indicated policymakers in the Monetary Policy committee were debating the “relative merits of near-term stimulus” in order to help the expected economic recovery along. He went on to say that stimulus might include interest rate cuts or more quantitative easing (QE), both of which debase the value of the pound.
