(MENAFN - ING) We do not expect the BoE to deliver a hawkish shift in policy today, with likely no hints at an earlier hike and no more than two votes for an earlier end to QE. Balance-sheet reduction talks will be in focus as well. On balance, we expect a limited GBP impact. USD may stabilise after Clarida's hawkish remarks, while another CNB hawkish hike should help CZK. In this article
- USD: Clarida dispels tapering doubts
- EUR: Back to the middle of its recent range
- GBP: We expect a contained impact from the BoE meeting
- CZK: CNB expected to deliver another hawkish hike today
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Subscribe to THINK USD: Clarida dispels tapering doubts
A largely range-bound trading session was shaken yesterday by a set of hawkish comments by Fed’s Vice Chairman Richard Clarida, which pushed the dollar higher, especially against the low yielders JPY and CHF. Despite the Delta variant spread, Clarida signalled how the US economy is on a fairly solid recovery track, which warrants an unwinding of monetary stimulus. He added that if the growth outlook remains strong, he favours a tapering announcement by the end of the year. On forward guidance, he said that he expects the economic conditions necessary to raise rates to be met by the end of 2022, which allowed markets to cement their view that a first-rate hike will be delivered in 2023.
The hawkish comments by Clarida came at a time when markets were starting to look with some concern at some data misses (including ADP payrolls earlier yesterday) as a potential signal the Fed might have to turn more cautious on its tapering plans. The hawkish re-pricing after Clarida’s speech was likely helped by a very strong July ISM services read (64.1, a record high).
In FX, Clarida’s comments are allowing the dollar to stay well supported into the payrolls numbers on Friday. USD/JPY has been the pair where the dollar’s jump has been more evident: a strong NFP could easily assist a decisive break back above 110. For today, the dollar could merely find some stabilisation amid a fairly quiet US calendar (focus will only be on jobless claims). In terms of Fedspeak, keep an eye on Neel Kashkari’s speech at 2100 BST, although it will unlikely have bigger resonance than Clarida’s message.
EUR: Back to the middle of its recent range
EUR/USD remains largely driven by dollar dynamics.
Clarida’s hawkish remarks came at a time when the pair was testing the 1.1900 level, sending it back to the middle of the 1.1750/1.1900 range seen in the past month. Except for the rarely market-moving ECB economic bulletin, there are no clear EUR catalysts in the eurozone's calendar.
In the crosses, the post-Clarida hit to CHF was likely a welcome development at the SNB’s, and it allowed EUR/CHF to find some support after the recent sell-off in the pair had started to seriously test the Bank’s tolerance – here is our take on this topic .
GBP: We expect a contained impact from the BoE meeting
It’s all about the Bank of England meeting today.
In our preview (“Bank of England: Four things to watch at the August meeting ”), our economist highlights how we see a low probability that policymakers will turn more hawkish at this meeting. This means that we do not expect to hear any hints about an earlier rate hike or more than two votes in favour of an earlier end to the QE programme, which has recently been advocated by Michael Saunders - one of the most hawkish MPC members.
On the growth outlook, the spread of the Delta variant should force a downgrade of 3Q forecasts, but we expect the BoE to keep signalling the economy is on track to reach pre-pandemic levels by year-end. Short-term inflation forecasts should be adjusted to signal a peak at 3.5%, but longer-term figures should be left unchanged (CPI at target by 2023/24). This should result in a policy message that reiterates that significant progress remains necessary before the monetary stimulus is lifted.
Should our expectations on the tone at this meeting prove correct, we think the impact on GBP should be rather limited and neutral. If anything, there could be a risk that part of the market has priced in more than two votes for an early end of QE (a hawkish signal), which may cause marginal repricing of rate expectations and some GBP weakness.
Another factor markets will likely be susceptible to will be any discussion around the balance-sheet reduction. On this point, we think the BoE won’t do much more than simply signalling the previous 1.5% Bank rate threshold for starting balance sheet reductions will have to be reviewed lower at some point, which appears to be by and large a consensus view in markets.
CZK: CNB expected to deliver another hawkish hike today
Following its hawkish hike to 0.50% in late June, the Czech central bank is widely expected to deliver another 25bp hike today, taking the two-week repo rate to 0.75%.
In focus today will be the latest set of CNB forecasts – 2021 GDP may be revised up despite the soft 2Q GDP data – and how many members of the seven-person Bank Board voted for a hike. It was a four out of seven majority vote in June, with Benda going for a 50bp hike, while two others voted for unchanged rates.
There seems no reason to step back from their hawkishness today in that expectations for tighter policy had assumed that market interest rates would rise this summer (which they have for CZK money markets anyway) and EUR/CZK would gently soften – which it has as well.
Market expectations for the CNB tightening cycle are already pretty aggressive, however. After what should be a 25bp hike today, the FRA market prices a hike at each of the September, November and December CNB meetings (policy rate to 1.25%) and looks to price a further 50-75bp of tightening into next summer.
That could make the case that all the good news is priced into the CZK. Yet we would not want to stand in the way of any further CZK strength – after all, the CNB tightening cycle in 2017-18 was more aggressive than most expected. We remain comfortable looking for EUR/CZK to end the year in the 25.20/30 region and suspect any CZK dips are bought into.
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Francesco Pesole, Chris Turner
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