Ebury: The focus is on whether or not to continue ‘loose’ monetary policy

By Enrique Diaz – Alvarez *

The G10 currencies continue to move in line with the relative aggression shown by their central banks – although the “aggressive” is calculated in relation to an extremely frivolous consensus, in which monetary policy in developed countries remains extremely loose in general. The pound was weakened by the Bank of England’s sudden decision not to raise interest rates, while the dollar remained stable after the announcement of the US Federal Reserve to reduce its bond markets, which was largely in line with market expectations. The US currency closed the week with a positive tone after the strong employment report that came out on Friday. Meanwhile, the euro continues to struggle as President Lagarde stresses its lack of concern about inflation and pushes up interest rate expectations.

The key elements that will be made public in the near future will be those related to inflation. Next week we expect data on producer price inflation on Tuesday and consumer price index on Wednesday. Both are projected to rise further from already very high levels. Federal Bank officials’ speeches are in the spotlight this week as there will be controversy over the appropriateness of extremely loose monetary policy, as inflation remains well above the target for longer.

Sterling

The Bank of England seems to have taken communication with the market very seriously. After weeks of aggressive hints, the Monetary Policy Committee defied market expectations and left interest rates unchanged at its November meeting, while not committing to a specific date in the future. The pound did not react well and was one of the worst performing currencies in the world. This week, data announcements are back in the spotlight. While the US inflation rate may be the most critical data for the USD / GBP exchange rate, the UK’s monthly GDP data for September will reveal the rate at which the services sector is normalizing after the turmoil the Covid Delta variant.

Euro

President Christine Lagarde’s statements on rising inflation remain a serious obstacle to the common currency, and we have therefore revised our forecasts for the euro lower. We believe that longer-than-expected inflationary pressures are clearly a global phenomenon. They first appeared in the US, and lately they have been hitting the Eurozone with a delay, as is often the case with macroeconomic trends. However, this delay may allow the ECB to continue to rely on its optimistic forecasts for transitional inflation for some time to come, and it is difficult in such a situation to see an excessive rally of the euro in the next period.

US dollar

The Fed’s decision in November to cut government bond and mortgage markets was roughly in line with our expectations and market expectations. We expected a somewhat aggressive trend in the announcements, but President Powell remains firmly clear in his belief that inflation is temporary, despite the Fed’s failure to initially predict the arrival, extent and duration of the spike in inflation. The dollar fell slightly after that jump, but recovered again after the strong employment report released the next day. Now, all eyes are on Wednesday’s inflation report. The forecast shows a strong rise in both nominal and key indicators and for this reason we do not expect any changes in monetary policy.

* Chief Risk Officer of the international payment company Ebury. The company’s analysts were named by Bloomberg in the first place of the most successful forecasts for the EUR / USD exchange rate in the fourth quarter of 2020.