A hold a hike and a..
Well, that’s to be determined at midday today when the Bank of England presents its latest decision. This week’s significant rate hold came from the Federal Reserve. It was in Japan where an interest rate hike left traders scrambling to revalue exposed assets including the Yen. On the docket today, alongside significant Eurozone data, is the Bank of England monetary policy decision. Markets have held pricing steady, narrowly favouring a hike at today’s meeting. It should be noted that today’s press conference is the first opportunity for the governor to discuss rate policy since the general election. With fiscal policy in focus, could uncertainty unwind Sterling’s current spot levels? So far in today’s session, it certainly has. I maintain the view that the Bank will cautiously cut rates later today to the detriment of GBP spot levels. It’s a relatively low conviction call and should this view materialise, it would likely only be by a slim margin and split decision.
Interest rates in Japan now sit at a target overnight rate of approximately 0.25%. Having only just scraped out of negative nominal territory, in real terms the interest rate remains deeply negative. So why then has the change of decision extended the correction in USDJPY into the high single digits in only one month? The answer is that the hike from the BoJ was just one factor demonstrating a newfound credibility towards normalising its currency. In addition to the hike, the BoJ also committed to halve its monthly bond purchase (quantitative easing) programme. Coupled with active currency intervention to the tune of several billion US Dollars on numerous occasions, time has been called for now on a decade long rally in USDJPY.
Despite a hold from the Federal Reserve last night, USD remains stable in markets. There were enough signals present at the press conference and in the statement to foreshadow a September rate cut. Additional rate cuts seem likely to follow later on in the year and into 2025. Bar the months leading to the 2008 financial crisis, this remains the longest duration for which interest rates have held at their peak for 50 years in the United States. From a historical perspective, the Fed and global central banks could be considered to be living on borrowed time with respect to policy normalisation.
Discussion and Analysis by Charles Porter
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