Spectrum FX Daily Report

Slew of central bank announcements make for volatile week

We’re approaching the end of what has been an extraordinary eventful week in the foreign exchange market, with a host of central bank announcements very much keeping investors on their toes.

On Wednesday, the Federal Reserve raised interest rates by 75 basis points, the largest hike in nearly thirty years. This was nearly unthinkable a week ago but, in the end, was almost entirely priced in by markets following last Friday’s bumper US inflation report. The European Central Bank panicked, and more-or-less admitted it got last week’s communications totally wrong, by holding another emergency meeting on Wednesday morning, only to yet again announce very little. Perhaps the biggest surprise of the lot came from the Swiss National Bank, which raised rates by 50 basis points on Thursday morning, while changing its guidance on FX intervention in a pretty historic move.

Sterling rallies as Bank of England paves the way for 50 basis point rate hikes

Attention on Thursday afternoon turned to the Bank of England that, as was largely expected, hiked interest rates by another 25 basis points. Sterling initially sold-off sharply against the US dollar, down almost around one percent at one stage, as some investors were hoping for a 50bp move or, at the very least, saw an extra dissenter in favour of a larger hike. All nine members of the committee were in support of an immediate hike, although only three policymakers voted in favour of a larger, 50 basis point move (Jonathan Haskel, Catherine Mann and Michael Saunders). Financial markets were actually pricing in a decent chance of a bumper 50 basis point rate hike, particularly following the hawkish turns mentioned above, so no surprises to see the knee-jerk move lower in the pound.

Within an hour of the press release sterling had, however, recovered all of its losses and ended London trading yesterday fairly sharply higher (GBP/USD soared back through the 1.23 to its highest level so far this week). After the initial disappointment, focus turned to the remarks within the bank’s statement, which markets viewed as hawkish. In the statement, the MPC removed its previous forward guidance that ‘some degree of further tightening in monetary policy may still be appropriate in the coming months’ - a line that we criticised last month for being unnecessarily ambiguous. Instead, the MPC said that it was ready to act ‘forcefully’ in order to tackle the persistent inflation overshoot.

We think that the above change is the Bank of England’s attempt to convey to markets that it is shifting its attention back towards inflation, versus previous remarks that conveyed heightened concerns over UK growth. This has very much opened the door to 50 basis point moves at upcoming meetings - indeed, markets are currently pricing in 100 basis points of hikes through the next two meetings in August and September. This provided strong support for sterling, which ended yesterday as one of the better performing currencies globally, behind only the Japanese yen and Swiss franc in the G10.

Euro Area inflation data (this morning), and another speech from Fed chair Powell (this afternoon) will round off what has been a very hectic week in financial markets.

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