Wednesday’s main focus for traders was The Fed Reserves Interest Rate decision, an eagerly awaited data release providing forward guidance on interest rates and monetary policy. Rate hikes globally have been a topic of conversation over the past few months with inflation over-shooting many central bank targets of 2%.
The main takeaway from The Fed’s meeting was the commitment to reduce its monthly bond purchases “soon” as well as stating Interest Rate hikes will follow sooner rather than later. 9 out of the 18 policymakers projected that borrowing costs will need to rise heading in to 2022.
One cause for concern right now is inflation running at more than double the target rate, putting more pressure on The Fed to act. The quickness in rate hikes however is expected to begin slowly with Interest Rates seen rising to 1% throughout 2023, again gradually moving to 1.8% by 2024. Both figures and dates being quicker timelines than initially projected. Aside from inflation, unemployment is expected to fall back to the “norm” of 3.5%. GDP projections have also been downgraded since June, with growth of 5.9% coming in underwhelmingly below the projected 7% in June.
Expectations from Fed Reserve chairman around tapering asset purchasing could begin “very soon” with the aim of being completed by the middle of 2022.
GBP weakened gradually throughout Wednesday as the build up to The Bank of England’s monetary policy meeting took it’s toll. As with The U.S, The Bank of England are expected to keep interest rates on hold, and therefore it’ll bring more importance to the press conference after, with ears peeled firmly to the forward guidance surrounding rate hikes and tapering. Although there have been positive comments from The Bank of England in recent months, the exact outlook for The UK’s economic recovery is blurred by The European energy crisis currently hitting The UK. Our capability for gas storage here in The UK is much lower than that of Europe, meaning we rely heavily on energy imports.
With five small energy firms already being faced to fold due to the energy crisis, the government has subsidised the production of CO2 in order to prevent any further disruption to the food industry as we enter the winter Christmas months. Add this to the existing supply chain issues and staff shortages, and the outlook for economic recovery looks bleak.
The Euro’s gains Wednesday were short-lived as political uncertainty surrounding the German election took it’s toll on the currency. Angela Merkel has kept her position of Chancellor for Germany for the past 16 years bringing a source of stability and certainty throughout. A mainstay of Merkel’s tenure was the coalition with Centre-Left Social Democratic Union leader Olaf Scholz. Although GBP is weighed down currently, concerns linger along with rumours circulating that the Social Democratic Party will cause a coalition with far-left party Die Linke Party. There are so many different possible outcomes this evening or tomorrow, that any surprises will of course impact on the rates.
