In our FX review this week we run through the surprise move by the Bank of England to not raise interest rates, along with the US Fed meeting on Wednesday evening.
The Fed act as planned
Heading into the week, the two main events both involved central banks. First up was the US Fed on Wednesday evening. Monday and Tuesday saw low volatility, with investors waiting to see what would come out of the meeting. The expectation was that the Fed would start to taper off asset purchases, given the rebound seen since the start of the pandemic.
This did indeed pan out, with Chair Powell noting the improving economy. The rate of tapering assets was slightly quicker than we expected, do be completed at a rate of $15bn per month. This increase (many thought it would be reduced by $10bn per month) was part of the reason why the US Dollar (USD) gained after the meeting.
Given the Bank of England meeting on Thursday, the cleanest way to play the Fed was via USD/CHF or USD/CAD in our opinion. Neither really had a large enough shift on Wednesday to make decent returns, so the focus turned to GBP on Thursday.
Bailey bottled it?
The main event turned out to be the Bank of England, with a surprise decision not to hike interest rates. With GBP rallying in previous weeks, 15bps was priced into the markets for this meeting, making it seem as if it was a done deal. The only real trade on this was to short GBP, if you thought that there was a small chance of no hike. Such a move would have paid dividends, as GBP pairs dropped like a stone during the meeting. This move continued into Friday morning, before a small rally back into the close.
GBP/USD tested the lows seen last month around 1.3425 on Friday. This was some place to be, considering the pair started the week around 1.3675. EUR/GBP also moved higher, despite EUR having a quiet week in general.
Looking at what Governor Bailey said, it appears a rate hike is still looming for the UK in the near future. A lot rests on data releases over the course of the next month, particularly the inflation print.
Trade ideas at the moment
We still like being long USD in most cases, especially following the Fed meeting. At the same time, the hit to GBP could tactically reverse into next week as markets get over the surprise from the bank. We therefore think there are nice setups to be had getting long GBP/CHF or short EUR/GBP at current levels.
For a play on the USD, being long USD/CAD could be an attractive look. With oil prices elevated, any pullback should see CAD weakness. This would help to complement a push higher in the pair.
Next week we keep an eye on US inflation on Wednesday and UK GDP for Q3 on Thursday.