The Fed explains that pandemic stimulus can start to be
unwound as “substantial further progress in the economy has (been) made toward
the Committee’s goals since December 2021.” They left interest rates
unchanged, which was expected and continued to use the word “transitory” to
describe inflation.
While some investors believed they would drop this language,
it did not seem to matter as once the dust settled, USD ended the day virtually
unchanged (slightly lower) from its pre-FOMC levels against other the major
currencies. Stocks and bond yields ended higher which should benefit JPY
crosses.
Looking ahead to Friday’s non-farm payrolls (NFP) report,
economists expect a significant recovery in job growth during the month of
October. A large part of this has to do with the slowdown in
September, when non-farm payrolls rose by only 194,000. That number is expected
to more than double this week with a consensus forecast of 450,000.
According to ADP, private sector payroll growth was very
strong last month but even though service sector activity hit a record high in
October, the shortage of workers drove the employment index lower. As one
of the most important leading indicators for non-farm payrolls, this suggests
that while more jobs are expected in October, the increase may fall short of
the market’s lofty forecast.
Will BoE hike rate today?
While the countdown to Friday’s NFP report has started, analysts
have shifted focus to the monetary policy announcement by the Bank of England
(BoE) on Thursday. In many ways, the BoE rate decision should have a
greater impact on GBP than FOMC did on the USD because the UK central bank is
close to raising interest rates.
As the second major central bank to reduce asset purchases,
the BoE has been leading the pack in unwinding pandemic support and with
inflation surging, a small contingent of investors believe they could hike as
quickly as Thursday. The market is pricing in a 60% chance of 15bp hike which
means a full quarter point move is unlikely. However the central bank has
done a smaller adjustment before so we can’t rule out that possibility
completely.
BoE Governor Bailey and monetary policy committee member
Saunders have suggested that an immediate hike may be needed but other
policymakers want to see further improvements in labor market activity or
evidence that inflation is less transitory before making the move.
With the Reserve Bank of New Zealand raising rates, Bank of
Canada announcing ending to Quantitative Easing and the Fed beginning to reduce
asset purchases, there is a decent chance for a rate hike by the BoE. It may
not be a full quarter point, but it could be 15bp increase.
The immediate tightening should be wildly positive for the
greenback as it is not really anticipated. However, if they forgo a rate
hike in November, then a hike in December becomes very likely.
In this scenario, analysts expect no change to be
accompanied by hawkish comments which could be initially negative but
ultimately positive for GBP. Either way, barring an unexpected surprise analysts
see GBP strengthening post BoE announcement, particularly against EUR.
