BoE Asset Purchase and Interest Rate Non-News

[Purple Brain]

Carney has said GBP interest rates will not be even reviewed until unemployment drops to 7% which could take as much as 3 years. There are caveats and exceptional conditions under which he has said this would be overridden, but none of those factors currently apply.

So why when there was virtually no chance of any change to interest rates and the APF data came in bang on target, did GBP strengthen appreciably? It looks like it'll show as a spike when the dust settles, but even so, when expectations are so clearly set and met - why the surge?

 

[Martinghoul]

Because the market is pricing future changes to interest rates, rather than what's currently the case. For instance, can you be quite certain that the 7% unemployment rate cannot be attained in 2yrs? How about 1yr?

 

[Liquid validity]

Because the market is pricing future changes to interest rates, rather than what's currently the case. For instance, can you be quite certain that the 7% unemployment rate cannot be attained in 2yrs? How about 1yr?

Agree, market thinks he's too downbeat:
British service sector soars in August - PMI | Reuters

Time will tell.

 

[Purple Brain]

Because the market is pricing future changes to interest rates, rather than what's currently the case. For instance, can you be quite certain that the 7% unemployment rate cannot be attained in 2yrs? How about 1yr?

How can the expectations of future changes be impacted by no change in the present levels and especially when there was not expected to be any change to current levels?

If pricing futures I could understand spikes or changes in the prices of futures contracts, but spot?

I appreciate this is probably way over the top of my head.

 

[Purple Brain]

The GBP move appears to have been a spike which would suggest whatever moved the market was extremenly temporary as it has almost returned to pre-data release levels on GBP across all other majors. If it were a re-pricing on futures or whatever, surely it would have stayed at those levels?

Does anyone in the business believe there is any truth in the oft-quoted rumour that institutions use these data events to trigger customers' orders in order to earn the spread? Are they able, either independently or in concert, to put that much weight into a market to shift the price through areas where the majority of their customers limit orders sit?

 

[Liquid validity]

The GBP move appears to have been a spike which would suggest whatever moved the market was extremenly temporary as it has almost returned to pre-data release levels on GBP across all other majors. If it were a re-pricing on futures or whatever, surely it would have stayed at those levels?

Does anyone in the business believe there is any truth in the oft-quoted rumour that institutions use these data events to trigger customers' orders in order to earn the spread? Are they able, either independently or in concert, to put that much weight into a market to shift the price through areas where the majority of their customers limit orders sit?

Release was at 12, 15620 ish, now at 15650?
Are you getting mixed up with 1245 ECB min bid rate?

 

[Liquid validity]

Eu looks like its possibly found support @ daily low.
See if it holds...

 

[Liquid validity]

cracked the low

 

[Purple Brain]

Release was at 12, 15620 ish, now at 15650?
Are you getting mixed up with 1245 ECB min bid rate?

With the exception of usd and cad, gbp has come back since the 12:00 BST BoE data to lower levels against all the other majors than before that data was released. I appreciate it can make 40-50 pip moves like that on any day for no obvious reason, but I wondered if the scheduled data release events were commission generating opportunities for the institutional players rather than genuine responses to changes in the fundamentals of the countries' economies or currencies.

 

[Liquid validity]

test of yesterday low at 40?

 

[Liquid validity]

With the exception of usd and cad, gbp has come back since the 12:00 BST BoE data to lower levels against all the other majors than before that data was released. I appreciate it can make 40-50 pip moves like that on any day for no obvious reason, but I wondered if the scheduled data release events were commission generating opportunities for the institutional players rather than genuine responses to changes in the fundamentals of the countries' economies or currencies.

The EU is leading it now.
Cause of ECB conference

 

[Liquid validity]

test of yesterday low at 40?

40 holding by looks of it...for now

 

[Purple Brain]

I'm finding it impossible to trade. Any of them. Horrible. GBP is the only one that could provide potential longs if it starts to lift. Trouble is I'm mentally done by this stage and more likely to discount any further signals anyway.

 

[Liquid validity]

BTW, I know this thread is GU and BOE, I'm watching EU in case you were
scratching your head going wtf?

 

[Martinghoul]

How can the expectations of future changes be impacted by no change in the present levels and especially when there was not expected to be any change to current levels?

If pricing futures I could understand spikes or changes in the prices of futures contracts, but spot?

I appreciate this is probably way over the top of my head.

Well, there's a certain logic at work here. Firstly, spot is affected by the market's expectations of future carry. This carry is affected by the expectations of where interest rates will be in the future. So what you have observed this morning was a move in spot that was driven by the repricing of future interest rates (as manifested by the move in short sterling futures). It's really as simple as that.

 

[Liquid validity]

Looks like EU is done till 3 with ISM PMI,
unless someone in G20 / ECB drops a brainfart...

 

[Purple Brain]

BTW, I know this thread is GU and BOE, I'm watching EU in case you were
scratching your head going wtf?

That's my natural state unfortunately.

 

[Purple Brain]

Well, there's a certain logic at work here. Firstly, spot is affected by the market's expectations of future carry. This carry is affected by the expectations of where interest rates will be in the future. So what you have observed this morning was a move in spot that was driven by the repricing of future interest rates (as manifested by the move in short sterling futures). It's really as simple as that.

You have explained it in a way that makes it appear simple which is greatly appreciated. What is lost on me is why future interest rates were repriced based on nothing [obvious] changing. My guess is that there is quite a lot which is not obvious to me, but glaringly so to pros such as yourself.

I get a sense this comes back to a point I was struggling to make earlier this week in that I felt we are all in the business of trading expectations rather than the physical underlying as it is at any current point in time.

Martin, your explanations much appreciated. Thanks for taking the time.

 

[Martinghoul]

You have explained it in a way that makes it appear simple which is greatly appreciated. What is lost on me is why future interest rates were repriced based on nothing [obvious] changing. My guess is that there is quite a lot which is not obvious to me, but glaringly so to pros such as yourself.

I get a sense this comes back to a point I was struggling to make earlier this week in that I felt we are all in the business of trading expectations rather than the physical underlying as it is at any current point in time.

Martin, your explanations much appreciated. Thanks for taking the time.

No problem, I am happy to help.

Indeed, you're right, what has been happening recently in the UK rates mkt is a little esoteric and hard to understand outside of context. Specifically, the important thing to remember is that the BoE released an unscheduled statement (it's a relatively rare event) after the July MPC meeting, the first one that Carney chaired. So Carney came in with a bang. The wording of the statement was something along the lines of "implied rise in the expected future path of rates was not warranted by the recent developments in the domestic economy". That was the signal why rates (and currency) should reprice lower, which they did after Carney subsequently introduced fwd guidance. Since that time, however, "developments in the domestic economy" have gone absolutely gangbusters and, all of a sudden, Carney has stopped talking about the "unwarranted implied future path of rates".

All of this has really been very painful for some people who positioned themselves for lower rates after the first statement. Some of these people who were still clinging on to their "rates lower for longer" positions were hoping that there will be a statement out of the BoE today, which would repeat the "unwarranted rise" comment. When the BoE didn't release any statement, these people got washed out, which triggered stops and moved implied mkt rates sharply higher. The sharp spike in the currency was just a result of the move in rates.

 

[Purple Brain]

What a stunningly useful response. There are we retail traders piddling around with nothing more pressing than price levels and lines to concern ourselves with, while the reality of the wider trading world totally dwarfs our little universe with its complexity and richness.

How would anybody such as myself as an individual retail trader ever get into the flow of the fundamental data and human factors such as you have explained to us here? The awareness of who the players are and who's feeling the pain and under what circumstances and the likely result of of implied and unmet expectations. Is it possible other than by working in a professional environment?

To be honest, even if I had been aware of the issues you describe I wouldn't have known how to trade it and I wasn't in a gbp trade at the time, but I certainly would have given the event far more attention than I did based on my erroneous determination that nothing likely to change would mean no major move in spot sterling.

Thanks again for your expansive reply.