USD has been one of the major winners and GBP the major losers following 24 hours of frantic central bank action.
Let’s start with last night’s FOMC rate decision;
Net-net, it was dovish event as expected. The Fed held rates at record lows and continued its monthly asset purchase programme at $80bln per month, all while warning that risks to the US economy remain tilted to the downside, despite the better than forecast recovery so far. Moreover, the Fed reiterated that it is ready to do more stimulus (in the form of more QE) if required and it remains flexible on that front.
Also as expected, the Fed changed the wording of its statement to reflect its recently adopted 2% average inflation targeting policy; in other words, the Fed is trying doubly hard to reassure markets that rates are staying low for a VERY long time, even if inflation does start to pick up.
Pretty much, the Fed said that rates are not rising until inflation goes above 2% for a sustained period of time (which almost no one thinks it will in the near future) and we get to what the Fed deems is “full employment” (likely pre-Covid-19 levels of unemployment of about 3.5%).
However, markets seemingly wanted a little more from the Fed, and were perhaps disappointed that there was no expansion of the Fed’s QE programme (when pressed on whether the Fed might up QE purchases, Powell essentially refused to answer and just noted how the current policy is appropriate). Hence stocks sold off and USD rallied, with DXY going as high as the 93.50s last night, though in fairness it is today well off these levels (but still well above pre-FOMC sub-93.00 levels).
Now turning to the very different reaction of GBP to today’s Bank of England meeting; GBP sold off hard in the immediate aftermath of the rate decision, with GBPUSD slumping around 80 pips to below 1.2900 (note, GBPUSD recently spiked higher, eroding most of these earlier losses on an FT article claiming that EU Commission President von der Leyen said she is convinced a trade deal with the UK is still possible, despite recent move by PM Johnson over the internal market bill).
In terms of what happened in the rate decision then; no major policy changes were made, but the bank noted that “it had briefed its monetary policy committee member (those who vote on policy) on the research around negative rates”, as well as was going to start consulting with UK financial regulators about how to implement them.
This shows the BoE is getting increasingly interested in negative rates, which is very dovish and is a big GBP negative (if you are an international currency managers, would you rather put your cash in a country where you get a positive interest rate on your deposit, or a negative..? Positive, of course, hence why GBP holders would be encouraged to sell and buy a better yielding currency).
Other aspects of the rate decision were also “dovish” (or “pessimistic” on the outlook); recent stronger than forecast data was played down and the BoE noted increased risks to the UK economic outlook (Brexit, Covid-19 and the unwind of the furlough scheme).
So more QE (which is a GBP negative, as QE supresses interest rates in the UK and thus reduces the incentive to invest in GBP) is likely in November.
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