“Yesterday, the head of the Bank of England did something very funny: Right as the World Cup was kicking off, he issued the warning that people have been waiting for for years. He said that rate hikes might come sooner than expected.
Of course, like any good central banker, Mark Carney talked about how no decisions have been made and how everything is “data dependent” but the language he use definitely caught people by surprise.
In a note to clients last night, Citi FX guru Steven Englander explained why investors might extrapolate Carney’s comments to the US as well. Basically, just a month ago, Carney was sticking to dovish language (like his counterparts in the US). Then the UK got another month of strong economic data (like the US). And in the past, the BOE has been ahead of the curve in terms of policy, with the US close behind. So you can’t blame investors who now might worry similar language could come from the Fed at a moment’s notice.
Here’s Englander’s take:[It is] possible that the shift in the BoE stance may also be affecting how investors are viewing the likely evolution of Fed monetary policy. The worry may be that just as UK forward guidance proved to be less guiding than investors had earlier thought, the Fed may turn around, and use the same language….” Twitter