In the past 10 days, the amount of change from G10 central banks is enough to make your head spin. It, therefore, makes sense to stop and do a quick synopsis of where we stand with bank policy across the G10 sphere and try to work out how this plays out in FX land going forward.
First I am going to take the stance of the Fed as ‘read’ from last weeks post. There is no doubt a lot has happened on Constitutional Ave and will continue to in March but let look at what else took place last week.
ECB – The European Central Bank
- Left policy settings unchanged no shocks there, and there was nothing to raise the heart rate, even a little in the statement.
- The press conference however was anything but ‘smooth’ as President Lagarde revealed concerns about the rising inflation across member countries. This has raised the potential for a policy shift at the March meeting.
- The standout of the Lagarde press conference was her pushed back on questions about the ECBs stance that a rate move was still seen as “highly unlikely” in 2022.
Here is the standout quote:
“[the] situation has changed…Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term…There was also a concern and a determination around the table not to rush into decision unless we had a proper and thorough assessment based on data and the analytical work that will take place in the next few weeks.”
The ECB Dove is malting
BoE – The Bank of England
- BoE raised its policy rate for a second time adding by 25 basis points (bps) to its cash rate seeing it move to 0.50%.
- The Board also announced the start of a slow wind down of its balance sheet –Quantitative Tighten however most of this will be done by not reinvesting maturing bonds.
- Need to highlight the vote – 5-4 which seems close, however the four dissenters voted to hike by 50bp rather than 25bp, so we are far from over with rate rises at the BoE.
- However, the press conference did try to dampen impressions of a more aggressive stance – but whatever way you cut it the BoE is hiking towards their projected 1.5% for Bank Rate in mid-2023.
Hawkish as Hawkish gets really
RBA – The Reserve Bank of Australia
- Kept the cash rate at 0.1%, no surprises there nor was it a surprise that it announced the end of its bond purchase program.
- What caught the most peoples attention was the significantly lifted its inflation forecasts.
- The Board counted this by maintaining the line that the sustainability of its inflation forecasts can only be achieved with clear evidence of wages growth.
- This was designed to pore cold water on the market and economic community calling for a rate rise near term.
- At his annual National Press Conference address Governor Lowe did somewhat concede that the timing of the first move, could be “later” in 2022.
- At the same time, he stated clearly that he was puzzling that money markets are pricing about 100 bps of tightening, the same as what is forecast in the US – he is puzzled because US inflation and wages growth were double that of Australia’s, yet hikes are the same.
The RBA is still on the fence and not moving anytime soon.
The lead to mixed trading, AUD, GBP and EUR swung wildly through last week and there is no sign of this slowing in the coming period. Thus we need to keep watch the Fed for a baseline and a baseline trend for the USD to gauge other movements.
