29/06/2017 - Pound Surges As Carney Hints at Rate Hike 

GBP

Sterling surged yesterday following comments from Mark Carney about the future direction of interest rates. The BoE Governor indicated that higher interest rates will be "necessary" if UK businesses shrug off Brexit uncertainty and raise investment and wages against a brighter global backdrop.

The pound spiked against the dollar and euro after Carney said there were signs that a prolonged period of weak investment was coming to an end. UK output was now "in sight of potential", suggesting that a pick up in growth could lead to stronger domestic inflationary pressures. He said policymakers on the Monetary Policy Committee (MPC) would continue to balance the trade-off between supporting growth and jobs and keeping a lid on inflation. However, earlier this month Mr Carney said now was "not yet the time" to start raising rates from a record low of 0.25pc as he warned that the "reality of Brexit negotiations" were yet to hit the economy.

It came as Sir Jon Cunliffe, the Bank's deputy governor for financial stability, said policymakers had more time to assess the UK economic outlook before they needed to decide whether to raise interest rates. Sir Jon admitted that current projections for higher inflation over the next three years were "not a comfortable place" for the eight members of the Monetary Policy Committee (MPC). Sir Jon cited evidence that consumer spending, which powered economic growth at the end of last year, was slowing as households' real incomes are squeezed by higher inflation, which currently stands at 2.9pc.

EUR

The euro came off a 2017 high and eurozone sovereign bond yields cooled on Wednesday, after senior figures at the European Central Bank indicated the market misjudged remarks by Mario Draghi where he signaled  a move towards withdrawal of economic stimulus.

Investors have been  focused on the ECB president’s comments that “deflationary forces have been replaced by reflationary ones”. The phrase was delivered in a keynote speech at the ECB’s annual conference in Portugal, as a signal the central bank would reduce its bond buying in the coming months because an improving economy required less monetary easing.

Key Announcements 

13.30 – USD: Final GDP QoQ; Forecast the same as previous of 1.2%

13.30 – USD: Unemployment Claims; Forecast the same as previous of 241k