The Fed, the BOE and the ECB have an appointment with the markets

Feb 1, 2023
  • EUR/USD 1.0875
  • DOW JONES 34’086.04
  • USD/CHF 0.9160
  • SMI 11’285.78
  • EUR/CHF 0.9960
  • WTI CRUDE OIL79.08
  • USD/RUB 70.4570
  • XAU/USD1'924.00
The foreign exchange market has remained stable in recent days as we await the monetary po...

The foreign exchange market has remained stable in recent days as we await the monetary policy meetings of the US, UK and European central banks, all of which are expected to lead to an increase in interest rates. The Fed is expected to raise its key rate by 0.25% to 4.75% this evening at 8:00 p.m. Tomorrow, the Bank of England will follow at 1:00 p.m., with a forecast increase of 0.50% to 4%. Finally, the ECB will announce at 2:15 p.m. the increase in its main benchmark rates by 50 basis points according to forecasts. For the Fed, the situation is difficult. It must show the markets that it is still committed to fighting still-too-high inflation all while avoiding too much tightening of its monetary policy, which would push the economy into recession. This will be the eighth consecutive rate hike, but if the 0.25% are confirmed, this would mark a return to a more conventional policy after the ‘jumbo’ hikes of 0.75% and 0.50%. Increase of that magnitude had not been seen in 30 years. But as has been said, the central bank must also ensure that it does not slow down economy too much. Gross domestic product growth was 2.1% for the full year 2022, announced on Thursday the Department of Commerce. It was slower than in 2021, which saw the fastest growth since 1984 at 5.9%. Household consumption remained at a good level, despite inflation and the Fed’s rate hike, which weighed on households’ purchasing power. It is such consumption that has enabled the economy to stay on course. Consumer confidence rose 2.8 points in January to 62.7. The only small laggard was that the increase in consumption was done on credit as demonstrated by the data published by Amex and Visa. They reported a 7–8% increase in the volume of payments in their fourth quarter results and expect revenue growth of 15–17% for 2023.

With regard to the European Central Bank, the time has not yet come for moderation in its monetary adjustments. Faced with inflation that remains too high, a half-percent increase is expected as well as confirmation that others are to come. The European economy is seeing an improvement. The composite purchasing managers’ index (PMI) rose in January for the third consecutive month to just above 50.2. Employment growth also increased, suggesting a better outlook for the eurozone economy in 2023. This situation is giving the central bank a little more freedom to continue its monetary tightening.

The third major central bank to announce its decision this week is the Bank of England. A half-point increase of 3.5% to 4% is considered to be done deal by the markets. However, the future yield curve shows that the latter predict that rates will continue to rise to around 4.5% this summer before starting a decline towards 4.15% at the end of the year to support a slowing economy. Industrial production plunged in November to -5.1% on an annual basis, inflation remains above 10% and the consequences of Brexit are evermore apparent. According to a recent Ipsos poll published on Monday, long-divided public opinion is now skewed against Brexit. As a result, 45% of the UK believes that things are going worse than expected, compared to just 28% in June 2021. Only 9% think the opposite. An analysis by Bloomberg released this week shows that Brexit is costing the UK economy £100 billion a year, as damage extends from investments made by companies to the difficulties they face in recruiting qualified staff.

Last week, the Central Bank of Canada raised its key interest rate by 0.25% to 4.5%. This is the eighth consecutive increase in less than a year to counter inflation. The central bank indicated that it thought it would keep its current policy rate at this level for time to assess the impact of interest rate hikes. Nevertheless, it says it is ready to raise it again if necessary to reach its 2% inflation target. The market is still pricing in a half-point hike by June before any decline, much like what is expected of the Bank of England.

The ounce of gold reached it’s highest level since April 2022 at $1,949.20 last Thursday before falling sharply to $1,900 yesterday morning. The fear that Jerome Powell would adopt a more hawkish tone than expected this evening prompted investors to take profits. Data released yesterday by the World Gold Council shows that central banks increased their gold stock by 1,136 tonnes, i.e., about $70 billion, in 2022. This is the largest purchase by volume since 1967, according to the report.