GBP in focus as Carney hints at possible BoE rate hike

Another day in Europe is coming to an end, and those who like volatility were not left disappointed with the euro and pound making sharp moves as speculators responded to fresh rumours and comments from central bank officials. The single currency surged higher yesterday after the ECB President Mario Draghi said the threat of deflation in the Eurozone had gone and “reflationary forces are at play." Well, earlier today, the euro dropped back as the ECB said the market had misjudged Draghi’s speech on stimulus. Nevertheless, the EUR/USD was quick to rebound as the US dollar remained downbeat. But the single currency did weaken against the commodity currencies and the pound. The latter jumped after Mark Carney, Governor of Bank of England, said that if the jobs market remains healthy and unemployment low then the MPC’s “tolerance for above-target inflation falls,” which is another way of saying the BoE will tighten its policy if they are proven wrong on their inflation forecasts for a bit longer. Carney even explicitly said that “some removal of monetary stimulus is likely to become necessary” if business conditions improve further and wages rise.

The impact of hawkish comments from the BoE and dovish remarks from the ECB weighed heavily on the EUR/GBP. While this pair may now fall further, we prefer to play GBP’s strength against the Swiss franc, for the SNB is more dovish than the ECB, and the EUR/CHF pair has been rising in recent days. Thus, the GBP/CHF could be about to stage a more meaningful comeback than the GBP/EUR (i.e. EUR/GBP inverted). Indeed, the GBP/CHF has formed a potential reversal signal in the form of a bullish engulfing candle on it daily chart. We are now on the lookout for the dips to be supported in the short-term, especially around the broken resistance area of 1.2360-1.2400. If this area holds as support then we may see price head towards the Fibonacci levels shown on the chart, with our main short-term target being around old support and the 61.8% retracement level at 1.2735-1.2755.

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