Wednesday saw the eagerly awaited Fed Reserve meeting centred around Tapering, when would it start and by how much? All the speculation over the last week had pointed towards a tapering plan to begin the reduced asset purchases by $15b p/month. This is exactly how it panned out, with The Fed Reserve going further to state they can be prepared to adjust the pace of purchasing if the economic outlook warrants this. The aim is to bring an end to its bond buying program by Mid-2022.
Also hot topic for The Fed Reserve was the Interest Rate decision which was unchanged within the range of 0% – 0.25%. One of the main reasons was due a new inflation framework being adopted which would allow inflation to run above it’s target with the justification to make up for years of underwhelming inflation. With this signalling that The Fed seem comfortable to let inflation continue to soar for much longer, analysts are now pricing in nearly 3 rate hikes for 2023 which is way ahead of the current projection of a single rate hike anywhere between late 2022 and early 2023.
The bulk of inflationary pressure has stemmed from wage pressures, due to the supply of labour being too slow to recover from the pandemic. Alongside supply-chain issues leading to increased costs for both consumers and producers. It should be noted, although The Dollar saw an initial bounce off the back of this conference, it has since retracted due to the largely-patient stance The Fed have taken in regards to inflation expectations.
Midday brings the main event for the Foreign Exchange markets. It brings the turn of The Bank of England in releasing their Interest Rate decision. A better than expected economic recovery coming out of Covid has led to many analysts and traders pricing in a 15 basis point hike at today’s meeting for the past 10 days. The Office for Budget Responsibility see UK GDP to grow by more than 6% throughout the rest of 2021 and moving into 2022, as well as expecting inflation to run comfortably at 4% next year. Again well above the BoE’s target.
Inflation is currently at 3.1%, unemployment is below 5%, wage growth is on the rise and house prices are continuing to climb even after the stamp-duty holiday came to a halt. This all points to a positive economic recovery as well as supporting the notion that rate hikes will be affordable. The current state of play within the Bank of England seems to suggest the vote will be extremely tight, with a count of 5v4 split for a hike or to stay put until the December meeting. Irrespective of the decision, (due to moves being priced in) the tone of the speech will be a key factor for impacts on exchange rates moving forward.