Cable (GBP/USD) is extending its decline from near three-year highs set just over a week ago when Bank of England (BOE) Governor Mark Carney told an audience at the World Economic Forum in Davos that the Bank would begin to assess how it would 'evolve' forward guidance.
The GBP/USD hit a high of 1.6667 on Friday, January 24th, on the morning of the speech. Just over one week later, hours into London's first trading session for February, the currency pair was already falling below 1.6350 for approximately a 2% decline.
The speech had provoked several strong reactions with some reports, suggesting that Carney 'scrapped' forward guidance, with some commentators criticizing that forward guidance was dead.
However, a close look at the speech shows how Carney suggested that forward guidance would simply be updated due to the need to keep monetary policy accommodative even as unemployment falls towards its 7% threshold ahead of expectations.
"It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the MPC assessed back in August (...)
"This suggests that, even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy (...) That the attainment of the 7% threshold will not be associated with any immediate need to raise Bank Rate is reinforced by recent developments suggesting that UK inflation pressures are more contained," Carney said.
"The Bank's assessment of how to evolve guidance to changing circumstances will begin in our February Inflation Report. The MPC will consider a range of options to update our guidance, recognising both what we have learned about the behaviour of aggregate supply in the economy as well as the more benign inflation outlook."
As a result, the threshold to be used would be changed to a different indicator or combination of indicators. Furthermore, the insistence that the threshold was not a 'trigger' reinforces that forward guidance did not fail. In fact, Carney reaffirmed that the Bank would assess the prevailing economic conditions, including wider measures of slack and inflationary pressures. He would also say he was against "necessarily focusing on one indicator" in the future.
While some analysts predicted earlier this year that the unemployment threshold would be lowered, Carney's communications suggest that other measures will be employed.
The lower sterling exchange rate
now appears to price in lower interest rates despite the drop in the unemployment rate. It suggests investors are believing the Bank's commitment to low rates.
Against the above backdrop, GBP/USD continued to fall on Monday even as a slightly lower than expected headling number for the manufacturing PMI was arguably offset by strong levels of output and new orders, export orders at a three-year high and employment increases for a ninth-straight month.
Read: UK manufacturing sector PMI slips to 56.7 in January
Nonetheless, GBP/USD reacted with a 50+ pip swing lower with market chatter mostly focusing on daytrading talking points, such as the breach of technical levels, the 'erosion' of uptrends and setting of 'market tops'.
GBP/USD remains bullish, but the pair may take it slowly