In our FX review, we talk through the impact of a host of key central bank meetings, including the rate hike from the Bank of England.
A week packed with the central banks
As we flagged up last week, this week was always going to offer volatility. It was the last major trading week of the year, with releases from the US Fed, the ECB and the BoE, along with other central banks.
First up was the Fed. We weren’t expecting any major changes to policy, but there was clearly many who were bullish going into Wednesday. The Fed disappointed in the end, as they only decided to quicken the pace of asset tapering relatively moderately. However, the dot plot did reveal that 3 rate hikes are now expected for 2022. This means that we continue to hold to our long USD view for next year.
The slight disappointment meant that the USD did weaken after the Fed, but we put some of this down to profit taking from long USD positions over the past few weeks. Closing the books for the year after the Fed is probably a smart move for many.
A surprise rate hike
Next up was the BoE. We thought that they would raise rates last month, but surprised with no hike. The market was actually pricing out a hike for December, given the rise of the Omicron variant in the UK. Therefore, we went tactically long GBP/USD into the meeting, given the skew of potential reward vs risk.
As it happened, we were correct, with the bank deciding to raise rates by 0.15%. GBP/USD bounced higher on Thursday afternoon as a result. It was probably a wise call from the committee, given the high 5%+ inflation number from earlier in the week. It now allows the bank to sit back and wait to see how the economy performs in Q1 next year.
It was interesting to note that GBP retraced and gave back most of these gains on Friday, not only vs USD but also EUR and CHF. This could be an early indication that the market thinks this was a policy mistake. Or, in a similar way to the USD post Fed, it could be down to heavy profit taking at the end of the year.
Watch out for low liquidity
Other central bank meetings offered less interest to us. The ECB are going to wind down their PEPP programme as expected. The SNB also continued to flag that the CHF was overvalued. Nothing was really new information from these meetings, and the currencies offered little movement when compared to USD and GBP.
Looking ahead, we expect thin liquidity next week as we run into Christmas eve. Therefore, we’re unlikely to add on any large positions, and will be ideally stay light to avoid any squeezes.