What a day it was for Central Banks!! First the BOE announced their minutes and it emerged that TWO of the BoE’s interest rate setters voted to increase interest rates by 0.25% at the last meeting. They cited that the prospect that wage growth would pick up and that the last number should not be rubber stamped as the way forward. This was the first split in vote since July 2011 and marks a real change in the thinking of the setters. The MPC’s two dissenting voices “noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up”.
This was followed by the FED announcement and more to the point that Fed officials discussed in the July meeting the prospect of increasing interest rates earlier than expected. I have noted in this Blog (previously) that the Gov. and her colleagues will not have a problem pulling the trigger earlier than expected AS LONG as the economic stage presents an opportunity to do so. Too early and they risk putting all the QE and monetary policy framework in danger. It really is as simple as that.
The FED has kept America’s short-term interest rates near zero since the end of 2008, as it battled to fuel growth after the financial crisis of 2008. It had signalled previously that it could potentially wait until the middle of 2015 to increase interest rates, and only when it felt comfortable that the world’s largest economy had regained strength and weaned itself off other fiscal stimulus measures. So it came as a surprise to many Economists that at its July meeting they discussed whether they should take action sooner, according to minutes released on Wednesday.
With the Gov. impending speech at the Jackson Hole on Friday the Fed further stated that “The committee should provide additional information to the public regarding the details of normalisation well before most participants anticipate the first steps in reducing policy accommodation to become appropriate.” They also “stressed the importance of communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalisation approach could be made as the situation changed and in light of experience.”
So what does this all mean for currencies? Well as I noted in our Blog yesterday, the USD is mounting a serious challenge with 1.3300 broken (EUR/USD), 1.6600 (GBP/USD – it has retraced all gains from yesterday’s rate decision), 103.80 (USD/JPY).
It is my opinion that the USD (and I have said this many times) will break 1.3000 handle and by the year end could very well be trading around the low 1.20’s that’s how confident I am. Everything you read points to 1 main catalyst for this and that is the USA is coming OUT of the economic stagnation while EUROPE seems to be heading back IN to another mild (we hope) recession. This will have a marked impact on all currencies and therefore I expect to see a pickup in volatility as market makers begin to turn their positions around to reflect the anticipated change. Already we are seeing this in FX volatility levels.
EUR/GBP is going to be a tricky one in that if as I said above this is all about the USD then it is a case of whether the GBP falls in line with the EUR or given the state of the UK economy does GBP get a boost and thus drive EUR/GBP lower back to 0.7900. For now it looks like the cross is going to be somewhat side-lined with the main players focusing on USD crosses.
The coming months will indeed be interesting given the snippets of information the CB’s are giving us about the potential to hike rates. Make sure you are well positioned. You have a few months yet to get your affairs in order before the rate hike happens for real!!