Overnight price action was dominated by Sterling following a much more aggressive than expected speech from Bank of England Governor Carney. He indicated that an interest rate increase might come sooner than expected by the markets with the decision whether to raise rates becoming more balanced while macro-prudential measures were no substitute for monetary policy.
The comments were a clear hint that rates could rise soon, potentially before year-end, and also suggested a build-up of hawkish sentiment within the MPC. There was a sharp Sterling rally as GBP/USD moved to above 1.6950. EUR/GBP also hit fresh 18-month lows below the 0.80 level with strong UK demand given the global search for yield and a re-pricing of short-Sterling contracts.
The Bank of Japan policy decision was a more pedestrian affair with policy left on hold as expected. The bank was more optimistic surrounding the global economy which would benefit Japanese exports. USD/JPY did find support close to the 101.60 area with a move back towards 102.00.
There was some market talk that a more hawkish Bank of England tone would be mirrored by the US Federal Reserve at next week’s FOMC meeting and this provided some dollar support.
The Euro was able to derive some support from profit taking on short positions and moved to the 1.3580 in Europe on Friday. Gains were not sustained and there was a fresh retreat back to the 1.3530 area.
There were further concerns surrounding the Iraq situation with oil prices pushing higher and equity markets under pressure. These trends tended to boost the dollar and AUD/USD dipped sharply to near 0.9370 on diminished risk appetite.
US producer prices data was weaker than expected which dampened any immediate speculation over higher inflation and there was also a miss on the University of Michigan consumer confidence index as an improvement in the current situation component failed to offset deteriorating expectations. The data failed to provide any lift to the dollar with EUR/USD able to resist any further test of support below 1.3520.
USD/JPY struggled to move much above the 102.0 area as USD/CHF battled again with the 0.90 level. EUR/GBP was unable to regain the 0.8000 level and GBP/USD found support below 1.6950 as markets eyed key resistance around 1.7000.