USD Awaits Fed and NFP, Will the Bank of England Rise to the Occasion?

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The Fed is generally expected to announce that it will begin to reduce its huge monthly bond and asset purchases. Tapering could start as soon as a few days following the summit. Investors will almost definitely be paying carefully to Chair Powell’s news conference because the outcome has been so effectively telegraphed.

Short-term rates have been soaring significantly, but long-term yields have been unable to follow up, resulting in a flattening of the yield curve. Only one interpretation is that investors believe policymakers will be pushed to act sooner on interest rates, but that an unstable economy will prevent them from raising rates too quickly.

This week will be dominated by the long-awaited tapering announcement from Fed, with the October employment data adding to the hype. A normal meeting of the Reserve Bank of Australia has also been scheduled.

The Bank of England, on the other hand, may cause the most market turbulence as it considers whether to boost interest rates sooner rather than later to combat rising inflation. On the data front, employment statistics from Canada and New Zealand will be the other highlights, while OPEC’s monthly meeting is unlikely to result in any changes to production normalization plans.

The Reserve Bank of Australia has made it quite clear to the markets that it has no intention of raising interest rates until 2024. The economy, on the other hand, appears to be on the mend in Australia, with lockdowns progressively being lifted as vaccination rates catch up with those in Europe and America. Meanwhile, underlying price indices have begun to move higher, indicating that inflation is on the rise.

The Bank of England has been unambiguously steering market prices for rate rises higher since its last meeting in September. The repeated suggestions by Fed that a rate hike would be “appropriate” before asset purchases expire – an unprecedented step in the realm of quantitative easing – have increased the market probability of a 15 basis point rate hike in November to above 60%, with a hike by February completely priced in.

However, some MPC members do not appear to be in favor of a premature tightening, and the BoE has a shaky track record when it comes to clear communication. As a result, there’s a chance that the hawkish bets have gone too far.