News & Analysis


After touching its lowest point since October 13th, the loonie reversed losses to close the day out on a stronger footing yesterday after the Federal Reserve underdelivered on market expectations and broad US dollar weakness rang through FX markets. Today will be another quiet session for loonie traders today ahead of Friday’s labour market data, meaning the emphasis today will likely be on the fallout from the Federal Reserve.


Last night’s decision by the FOMC to taper its QE programme by a maximum of $15bn a month until year-end came as no surprise to markets, although the Fed retains optionality to adjust the pace of tapering going forward. The current pace would allow the QE programme to be completed by June, after which rate hikes will become a point of discussion again. In the absence of any huge surprises to the rate statement and following press conference, the market reaction remained rather limited, although the dollar weakened slightly as Powell reiterated a patient stance in tackling inflation. Markets took the Fed’s decision to not remove the word “transitory” when describing inflation dynamics as dovish at the margin. Despite this, June 2022 eurodollar futures – a proxy for rate expectations – showed limited reaction to the event as rate hikes are still priced in for when the QE programme is set to end. Today’s focus will be on the Bank of England rate decision before investors turn to US labour market data on Friday.


Following last week’s rise in EURUSD after markets were unimpressed by the European Central Bank’s effort to push back market bets for a rate hike in 2022, ECB President Christine Lagarde took it back to the media outlets in Lisbon yesterday. She renewed her pushback against rate expectations and stated that despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus the conditions needed to be met for rate increases are unlikely to be satisfied next year. In a different interview, she added that 2022 was “off the chart” in respect to interest rates. Despite the renewed efforts from Lagarde, money markets were largely unchanged after the remarks and continue to speculate on rate increases as concerns around inflation remain. Lagarde is set to speak again today at 13:00 GMT, just after the series of eurozone purchasing managers indices and producer price indices have been released. Elsewhere in Europe, the Norges Bank is expected to hold rates at 09:00 GMT after the central bank hiked rates in September.


To hike, or not to hike, that is the question. While money markets favour a 15bp interest rate hike from the Bank of England today at 12:00 GMT, we tend to disagree and believe the latest commentary by policymakers has done the dirty work of anchoring inflation expectations for the time being. Bloomberg Economics expects policy makers to hold rates with a 5-4 vote, shifting the onus to the December meeting for the first hike. Regardless of the outcome, today’s decision will be a market mover as economists and markets are split on the outcome. Beyond the immediate market impact, how the Bank delivers its decision today will be more deterministic for sterling than the actual hike. If the Bank chooses to hold rates now but confirms rate hikes are in store for the coming quarters, the pound could still benefit from rising short-term rates, although the rally is likely to be more subdued than in normal times given the uncertainty such a decision can have on economic growth. Crucial labour market data which would be necessary for the Bank of England to gauge the economic recovery is not available until November 16, which means it is unknown how the economy has so far adjusted to the closure of the furlough scheme. The lack of clarity on this would be the main reason for the BoE to stand pat today.



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