Morning Brief – A big week indeed

Charles Porter
Tue 31 Jan 2023

A big week indeed

Normally the first week of any new month is relatively significant. There is typically an above average volume of data releases with the notable non-farm payrolls in the United States normally the figure analysts are looking out most closely for. February will prove to be no exception with a significant load of data expected in the first few days of the new month. Today, the final day of January, also has several data publications scheduled. Each of these readings will be watched even more closely than usual given the other events scheduled for this week. On Wednesday evening, the Federal Reserve will deliver its latest interest rate decision. On Thursday, the ECB and Bank of England will follow suit with decisions of their own. 

It is not too uncommon that this cluster of central bank decisions takes place. The schedule of respective central bank meetings often means that decisions overlap. When this does occur it often brings one or both of two things. Provided that rates are in focus and on the move as they are now, the decisions can raise volatility in the markets making most assets display a level of instability. Secondly, if the monetary policy decisions provide noticeably divergent implications for present and future rates, we can see this divergence priced more directly into the affected currencies. Divergent monetary policy paths can often cause money to flow into the higher yielding currency at the expense of the lower. When decisions are spaced apart the market’s perception of the divergence is blurred with expectations and interim data disturbing the contrasting tones of the latest policy decisions. When they occur on the same or very next day to one and other the memory of the prior decision is fresh enough to provide a direct comparison without disturbance often leading to more significant currency shifts. 

So, what could the three deciding central banks produce? The interesting thing about this set of decisions is it could mark the point where the Federal Reserve in the US takes their foot off the pedal leaving the ECB and the BoE as the more hawkish banks. The Federal Reserve could and is likely to opt for a 25-basis point hike whereas the ECB and BoE have a non-negligible risk of opting for a 50-basis point hike. I have written about how the BoE could underwhelm and follow the Fed in a smaller rate hike, however, the ECB’s 0.5% hike looks all but confirmed. Each of these three central banks could easily throw in a surprise and the residual data due to be delivered today, tomorrow and into Thursday morning could still make a material difference to the final outcome. Implied volatility will remain elevated into Thursday’s decisions and expect realised volatility retrospectively to also rise.

Discussion and Analysis by Charles Porter

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