The Carney Trade
Mark Carney, the incoming Governor for the Bank of England, has signaled his willingness to tolerate a higher inflation rate in exchange for faster economic growth. In anticipation of more aggressive monetary stimulus and potential inflationary concerns, investors are selling pounds and buying inflation-linked bonds. As a result, the British pound has depreciated sharply, while inflation expectations have risen. Since the start of the year, the pound sterling has fallen 6.3% against the U.S. dollar, and the U.K. five-year expected inflation rate has surged 80 basis points.
U.K. 5-YEAR INFLATION EXPECTATION* VS. THE BRITISH POUND EXCHANGE RATE