BoE and Fed to Tighten Monetary Policy in Busy Week

As far as weeks go, this is a big one for the financial markets, packed full of important economic events and announcements.

Starting the week on Monday morning is the euro area, with an update for inflation and Gross Domestic Product (GDP); ending things on Friday is the US with October’s nonfarm payroll; and, sandwiched in-between, we have a couple of key interest rate decisions courtesy of the Federal Reserve (Fed) and the Bank of England (BoE).

Remember, with important economic announcements such as these, volatility usually increases around the time of their release. Therefore, anyone planning on trading around these events should exercise increased caution.

Euro Area - Inflation and GDP

The annual inflation rate in the euro area was reported at 9.9% in September, higher than the 9.1% of the previous month, but not as high as had initially been anticipated. Last Thursday, in an attempt to curb rising prices, the European Central Bank (ECB) hiked rates by 75 basis points for the second time in two months.

Despite the relatively large hike, which was in line with the market’s expectations, the euro dropped and the pan-European stock index, the Stoxx 600, rose as the ECB struck a more dovish tone in the subsequent press conference.

As with many central banks, the ECB is attempting to walk a tightrope of controlling inflation whilst avoiding a recession. For this reason, the twin announcement of inflation and GDP figures next week will be keenly watched by traders and investors on the continent and beyond.

If inflation is reported higher than anticipated, this will fuel speculation of a further aggressive rate hike at the ECB’s next meeting in December. Similarly, if GDP is reported better than expected, this could also raise the likelihood of further aggressive hikes, as the ECB will be less concerned about sparking a recession.

Conversely, if inflation is lower than expected and/or GDP is worse than expected, the possibility of a more moderate hike in December will increase.

The Fed – Interest Rate Decision

Rampant inflation is by no means confined to the euro area, with the US, UK and other nations also battling rising prices. However, whilst the ECB was comparatively slow to start tightening monetary policy, the Fed and BoE’s campaigns are well underway.

The Fed specifically has approached the task with particular aggression, hiking rates by 75 basis points three times in a row and, on Wednesday, they are widely expected to do so for a fourth time.

Increasing interest rates have contributed to the current bear market on the other side of the Atlantic, but they’ve also helped the US dollar surge, as higher rates stimulate foreign investment. Further hikes are likely to reinforce both of these effects.

Nevertheless, the anticipated increase of 75 basis points will most likely already be priced into the market, but expect to see a reaction if the Fed opts for a different figure. If rates rise by more than expected, expect to see a negative reaction in equities, and vice versa.

Conversely, as higher interest rates tend to have a strengthening effect on a nation’s currency, expect to see a positive reaction in USD if the hike is larger than anticipated, and vice versa.

BoE - Interest Rate Decision

The economic and political landscape in the United Kingdom has been quite turbulent over the last few weeks.

Last week, Liz Truss became the country’s shortest serving prime minister ever, after her spree of unfunded tax cuts spooked the markets, dragging GBP to historical lows and causing government borrowing costs to soar.

The consequential turmoil was so significant that it sparked an unprecedented emergency intervention from the Bank of England, who were forced to deploy billions of pounds in the markets buying government bonds.

Somewhat inevitably, Ms Truss’ premiership came to a swift end and the UK gained its third prime minister of the year in Rishi Sunak. The departure of Ms Truss and the subsequent reversal of pretty much all her policies has calmed the markets and the GBP has recovered much of its lost ground.

On Thursday, we will see how the BoE’s Monetary Policy Committee (MPC) reacts to the recent market turbulence. In the aftermath of the now mostly junked “mini-budget”, there was concern about how much the MPC would be forced to raise rates at their next meeting.

Whilst circumstances have undoubtedly calmed in the interim, the market consensus anticipates a rate hike of 75 basis points, with some analysts’ forecasting 100. Traders and investors can be sure to expect an increase in volatility in currency pairs involving the GBP and UK-listed stocks around the time of this announcement.

Trade the NFP with Admirals!

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On Friday - 30 minutes after the NFP announcement – an expert trader will provide a live session discussing the NFP, its effects on the financial markets and how it can be traded. Click the banner below to see all our upcoming webinars and reserve your place today:

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.