The pound surged past a two-week high against the U.S. dollar Wednesday after Bank of England Governor Mark Carney hinted that some of the Bank's stimulus may be pared back if the British economy were to improve.
Speaking at at the ECB Forum on Central Banking in Portugal, Carney said that while any changes in policy would be gradual, and that it's too soon to judge the degree to which slow consumer spending and business investment will impact the economy as a result of the Brexit process, the trade-off between tolerating faster inflation while trying to stoke growth will narrow if things improve.
"Some removal of monetary stimulus is likely to become necessary if the trade-off facing (the Bank) continues to lessen and the policy decision accordingly becomes more conventional," Carney said.
"The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations," he added.
The pound leaped more than 0.6% against the greenback to trade at 1.2935 immediately following the release of Carney's remarks as investors bet that the Bank of England will not be able to hold rates at historic lows while central banks in Europe and the United States signal policy tightening, as did both ECB President Mario Draghi and Fed Chairwoman Janet Yellen have done over the past 24 hours.