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