In the past 24 hours, we have seen that central bankers have still got a big influence on the direction of their currencies in the short term. This just goes to show that short term traders need to stay close to the newsflow as during times like these, any change to market expectations can have a significant impact on forex pairs.
Take the comments by Dennis Lockhart yesterday just after midday in the UK. Lockhart is a voting member on the Federal Open Market Committee (so his comments have weight) and is also a dove by reputation. However Lockhart gave a relatively hawkish steer that suggested that the possibility of a rate hike in June, July or September was still on the table. Perhaps if this had come from a hawk then this may not have had such an impact, however traders sit up and take notice when a dove gives a hawkish statement.
This turned the dollar correction on its head almost instantly. Although EUR/USD had already been off its highs at $1.1050, the pair subsequently dropped well over 100 pips over the course of the next few hours. This move has also seriously questioned whether the near term rebound in the euro is now at an end.
Moving forward to this morning, comments from the Bank of England’s governor Mark Carney have provided some support for the underperforming sterling. Recently, Carney has tried to play down the prospects of a rate hike by the Monetary Policy Committee. He is also seen as leaning towards the dovish side of the argument (he has always voted to keep rates on hold in the MPC meetings). However, today he gave comments suggesting that he felt that the next move on interest rates in the UK was likely to be higher. This also backed up the comments from fellow MPC member Ben Broadbent who alluded to a similar thing.
Both Carney and Broadbent have previously been considered to be doves on the MPC and this could now shake up expectations for interest rates in the UK. There are already three other MPC members who the market sees as teetering on the brink of turning hawkish (Martin Weale and Ian MacCafferty have previously voted for rate hikes, whilst Kristin Forbes has recently talked of her expectation that CPI at current record low levels is a temporary phenomena). This means that there could now be the prospect of 5 of the 9 members on the MPC beginning to lean more hawkish. This does not make a rate hike imminent but it certainly could begin to skew the expectations of future rate hikes.
This move today has had a significant impact on sterling, with Cable gaining sharply since this morning. Since the comments filtered through to the markets at around 0900GMT, GBP/USD has rallied around 70 pips. Interestingly, on the 5 minute chart there is a “breakout buy signal” on the Bollinger Bands as the 2.0 standard deviation bands begin to widen and the price trades outside the bands.
This is a great lesson for short term traders today. The technicals may be leading the charts, but you need to stay close to the newsflow as markets can turn very quickly on the comments of central bankers. Not only can this prevent painful losses, but also provide opportunities for quick profits too.