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A string of bad relationships and mixed messages
In the latest instalment of our “Thoughts of an FX Trader” article series, Head of FX Trading Demitri Theodosiou looks at the recent shock Bank of England decision, the surging dollar and what to watch out for in currency markets in the run-up to Christmas.
Apologies for the gap since my last post, but a colleague’s wedding followed by an unexpected bout of Covid-19 had me feeling rather worse for wear. The good news is I’m all clear and back to normal, even a few pounds lighter, which I will take!
It seems many investors had their own problems across the same period earlier this month, having positioned for the Bank of England to raise interest rates after many believed their hawkish rhetoric had signalled their intentions, only for the central bank to remain on hold. It seems those traders would also have found themselves a few pounds lighter too!
The previous Bank of England Governor Mark Carney earned the nickname of the “unreliable boyfriend” after his signals to the market often failed to translate into action. The same might be said for current Governor Andrew Bailey after this month’s meeting. The UK is at risk of having a string of bad relationships!
Sterling weakness was accentuated by renewed issues around the Irish border and heightened risk that the UK could trigger Article 16, potentially moving the UK from its current trade equivalence to a “hard Brexit” outcome.
After the Bank of England remained on hold, the market damped interest rate rise expectations across the curve and the pound softened. Sterling weakness was accentuated by renewed issues around the Irish border and heightened risk that the UK could trigger Article 16, potentially moving the UK from its current trade equivalence to a “hard Brexit” outcome.
Meanwhile, the Federal Reserve also held interest rates steady across the pond. Still, US inflation readings soared to a thirty-year high following the decision, and we saw another strong jobs report. Subsequently, the market is pricing in a policy misstep by the Fed, believing they will be caught behind the curve. As such, the US dollar has been strengthening across the board and US yields have been creeping higher. The mix of the softer pound and stronger US dollar sent cable to fresh 2021 lows last week, with a similar story for the euro against the greenback in the aftermath of this month’s strong US economic releases.
Attention will continue to be on inflation data and the readings of inputs such as raw materials and wage data that could continue to affect prices. Major central banks have started to wonder how transitory the surge in inflation will ultimately end up being, but for now, they are holding steady in wait-and-see mode. December policy meetings for the Bank of England and Fed and US jobs data at the start of next month will be the highlight of the calendar as we start the run-up to Christmas.
Which reminds me: I need to start doing my Christmas shopping; I hear prices have been going up recently…