Forex trading resulted in the GBP/USD pair experiencing its largest increase in three months on Feb. 12, as global market participants were impacted by the recent statements made by officials representing the central banks of both the U.S. and also the U.K.
The GBP/USD rose to as much as 1.6581 during the day in London, according to Bloomberg. This represented an 0.8 percent increase, which was the largest single-session gain since Nov. 13. One major factor that was cited as helping to push the value of this currency pair higher was speculation that as the U.K. economic recovery picks up steam, Mark Carney, governor for the Bank of England, might have a hard time keeping benchmark borrowing rates at their current low levels.
Carney has pledged to keep interest rates low
The BOE governor has stated previously that interest rates will experience slight increases at most, the media outlet reported. While Carney has promised that borrowing costs will not rise significantly, the U.K. central bank indicated on Feb. 12 that in 2015, interest rates could climb higher, according to Reuters. At the same time, the financial institution upgraded its predictions for the economic growth of the European nation.
Individuals were motivated to take part in forex trading and purchase the sterling as a result of anticipation that in the last six months of next year, the BOE could increase its borrowing costs, the media outlet reported. One market expert noted that the skepticism of Carney’s pledge to keep interest rates low was reflected in the actions of market participants who trade currencies, according to Bloomberg.
Expert notes skepticism of Carney’s promise
“The market at the moment is just not willing to trust Carney when he says rates will stay low,” Kathleen Brooks, who works in London at Forex.com as European research director, told the news source. “The market may challenge the Bank of England to just be more specific and not just expect us to believe they are not going to hike interest rates.”
Speculation that these borrowing costs will push higher as the European nation’s economy continues to improve has contributed to the Sterling appreciating relative to many currencies in the last 12 months, the media outlet reported. Data contained in the Bloomberg Correlation-Weighted Indexes has revealed that during this period, the British pound has had the best performance of any of the 10 currencies contained in this measure.
Impact of Fed speculation
Another factor that has played a key role in forex trading and the value of the GBP/USD is the speculation that surrounds the future policies of the Federal Reserve. The decisions of the Federal Open Market Committee have generated substantial visibility recently, as many market participants have been scrutinizing the statements of the officials working for this financial institution in an attempt to gain better insight into the timeline that will be used for lowering quantitative easing.
Janet Yellen, who recently became the chair of the Fed, testified before Washington lawmakers on Feb. 11, providing a view of the U.S. economy that seemed optimistic, Bloomberg reported. She said that the nation’s economic expansion is not in jeopardy as a result of the volatility that the global financial system has suffered lately.
The government official said that she will need more data before making any judgments about the labor market, and predicted that inflation will probably increase, according to the news source. One market expert forecasted that since the FOMC has started lowering its bond purchases, this tapering will probably not slow down without there being a good reason.
“It seemed like it was a long, hard decision to start tapering, and I think they’re loath to stop it unless they have a good reason,” Dana Saporta, who works for Credit Suisse Securities in New York as director of U.S. economic research, told the media outlet. “Unless we have a longer period of disappointing data or greater market turbulence, the Fed is still on track to taper” bond purchases by roughly $10 billion at every meeting.
The central bank recently made two reductions to its regimen of bond purchases. The Fed started buying $65 billion worth of debt-based securities starting this month. In January, it lowered its pace of asset purchases to $75 billion billion per month. Until the start of 2014, the central bank had been buying $85 billion worth of these financial instruments every month since 2012.
Yellen indicated that she planned to reduce these bond purchases at a moderate pace going forward, stating in her testimony that she would lower these transactions in “measured steps,” Bloomberg reported. This plan could combine with the inevitable raising of interest rates by the BOE to have an impact on forex trading, and motivate those who take part in such activities to push the GBP/USD higher still.
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