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Unlike FOMC, Expect GBP to See Big BoE Moves

  • Kathy Lien
  • 2 November 2017
Daily FX Market Roundup 11.01.17
 
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
 
The U.S. dollar ended the day higher against all of the major currencies despite the relatively subdued reaction to the Federal Reserve's November monetary policy announcement.  As expected the Fed unanimously decided to leave interest rates unchanged and their forward guidance unchanged. 
 
According to the FOMC statement, U.S. policymakers see economic activity rising at a solid rate despite the recent hurricanes. This positive outlook and their belief that the storms won't alter the economy's medium term course offset their concerns that inflation for items other than food and energy remained soft.  With spending rising at a moderate rate, investment picking up, the labor market continuing to strengthen and unemployment declining, investors saw the statement as a green light for December tightening.
 
After the rate decision, rate hike expectations for December increased from 82.8% to 92.3%.  Many sources are also saying that Jerome Powell will be President Trump's pick for Fed Chair.  As the market has fully discounted a Yellen departure, as long as Trump picks Powell or Taylor and not someone from left field, the dollar will rise as the uncertainty recedes. The announcement is expected on Thursday along with the Republicans' tax reform bill, which was delayed from today.  Unless there are any unexpected surprises on either front, the dollar should rise on these announcements.
 
With the FOMC rate decision behind us, the market will shift its focus to the Bank of England's monetary policy announcement. The market is pricing in a 90.4% chance of a hike tomorrow but we're not so sure that the BoE is ready to move especially given the larger trade deficit, recent weakness in manufacturing activity, retail sales and slowdown in CPI growth. Investors clearly feel different with the strength of sterling reinforcing rate hike expectations but market participants believe that even if the BoE stands pat in November, they'll hike in December with yearend rate hike expectations hovering just over 91%. These hawkish views were driven by the minutes from last month's BoE meeting, which revealed that a majority of MPC members see "scope for stimulus reduction in the coming months."  On that same day, BoE Governor Carney confirmed that not only have the odds of a hike have increased but he is among the majority on the MPC who see the need to change stimulus. 
 
However since then, we've heard Carney say inflation is likely to have peaked in October.  A hike could wait until December, but many investors believe the hike will happen in November because it will be accompanied by a Quarterly Inflation Report and a press conference that gives Carney the opportunity to explain the change and manage the market's future expectations.
 
If the BoE hikes, it would be wildly positive for sterling and could take the currency up to 1.3350.  Sterling will still rise if they leave rates unchanged but strongly suggest that a hike is coming in December but if they leave rates steady and suggest that a hike could still be a few meetings away, we could see GBP/USD hit 1.31.
 
Tomorrow's BoE announcement will be particularly difficult to trade because aside from hike or no hike, the number of people who support the move (or lack thereof), their updated economic forecasts and forward guidance will all play a role in how the currency trades.
 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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