FX Viewpoint 5 Nov 2021 | Fed, ECB, and BOE vs. markets: Rate debates | Article – HSBC VisionGo

Fed, ECB, and BOE vs. markets: Rate debates
Finance  ·    ·  6 mins read

  • Post-FOMC focus moves back to “relative” FX stories
  • The Fed will start tapering this month, while the ECB said it is “very unlikely” to raise rates in 2022… 
  • …and the BOE surprised markets by holding rates

While the Fed says it is too early for a rate debate, the FX market is embroiled in one already

At the 2-3 November meeting, the Federal Open Market Committee (FOMC) delivered on consensus expectations of a USD15bn taper in mid-November. In the press conference, the Federal Reserve (Fed) Chair Jerome Powell did not dwell on the hawkish risk case, instead he highlighted that it is too early to start the rate debate. The USD weakened modestly, before bouncing back the next day (Chart 1). This may reflect market expectations that the Fed will not be able to remain so patient through 2022.

 We think the USD will have room to strengthen, as focus moves back to “relative” FX stories

The FX market has also returned to the “relative” stories once again where the outlook for the Fed’s monetary policy remains in contrast to that for other central banks, for example, the very dovish guidance being provided by the European Central Bank (ECB). On 3 November, ECB President Christine Lagarde said it is “very unlikely” the conditions for a rate rise will be met next year. The case for the EUR as a funding currency (which often has a low interest rate) continues to build. As such, we expect the EUR to underperform the USD in the months ahead.

The BOE defied market expectations by keeping its interest rates on hold

On 4 November, the Bank of England (BOE) Monetary Policy Committee (MPC) voted 7-2 to keep its policy rate at 0.10%. This was a shock to the market which had almost fully priced in a 15bp hike. The MPC also voted 6-3 to continue with the existing quantitative easing (QE) programme, which in any case is scheduled to end next month. The BOE cut its growth projections but raised its inflation projections for this year and next (relative to its August projections). All this suggests “modest” tightening is coming, according to our economists. A rate hike in February 2022 is our economists’ base case, while the 16 December meeting is very much live.

We expect GBP-USD to be somewhat range-bound in the months ahead

The GBP plunged against the USD after the BOE’s announcement (Chart 2). Beyond the BOE’s fairly hawkish hold, we remain cautious on the GBP, given the likely limited scale of rate hikes going forward, a deteriorating current account deficit, and less fiscal support for the UK economy than before.

Disclosure appendix

This document is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Information in this document is general and should not be construed as investment advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on it, consider the appropriateness of the information, having regard to their objectives, financial situation and needs and, if necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. 
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered here on a principal or agency basis.
Whether, or in what time frame, an update of this information will be published is not determined in advance.
Additional disclosures
1. This report is dated as at 05 November 2021.
2. All market data included in this report are dated as at close 04 November 2021, unless a different date and/or a specific time of day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.


This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice.
This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You SHOULD NOT use or rely on this document in making any investment decision or decision to buy or sell currency. HBAP is not responsible for such use or reliance by you. You SHOULD consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document.
You SHOULD NOT reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to the US, Canada or Australia or any other jurisdiction where its distribution is unlawful.
Hong Kong
In Hong Kong, this document is distributed by HBAP to its customers for general reference only. HBAP is not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use or reliance of this document. HBAP gives no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document.
Notwithstanding this document is not investment advice, please be aware of the following for the sake of completeness. Past performance is not an indication of future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. When an investment is denominated in a currency other than the local currency of an investor, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. Where there is no recognised market for an investment, it may be difficult for an investor to sell the investment or to obtain reliable information about its value or the extent of the risk associated with it.
This document contains forward-looking statements which are, by their nature, subject to significant risks and uncertainties. Such statements are projections, do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from the forecasts/estimates. No assurance is given that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. No obligation is undertaken to publicly update or revise any forward-looking statements contained in this document or any other related document whether as a result of new information, future events or otherwise.
The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates and their respective officers and/or employees, may have interests in any products referred to in this document by acting in various roles including as distributor, holder of principal positions, adviser or lender. The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and employees, may receive fees, brokerage or commissions for acting in those capacities. In addition, The Hongkong and Shanghai Banking Corporation Limited, its affiliates and associates, and their respective officers and/or employees, may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in this document.
© Copyright 2021. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.