Foreign Exchange Weekly Review: The pound tumbled 1.4%, and the Bank of England’s failure to follow the rules is really helpless

The Bank of England joined the ranks of the Federal Reserve and the European Central Bank this week, pinning its hopes of adjusting dovish policies on the expected relief of supply bottlenecks in the next few months and the easing of inflationary pressures caused by these bottlenecks. The Bank of England announced that it will maintain the benchmark interest rate unchanged, making the market's interest rate hike expectations disappointed. The pound hit its biggest one-day drop of more than 1.3% in more than 18 months. This week it closed down 1.41% to 1.3493, and recorded a new low since September 30 To 1.3423.

The day before, the Federal Reserve announced the long-awaited reduction policy, which will reduce the monthly debt purchase scale of 120 billion U.S. dollars, and plans to completely end its debt purchase plan in mid-2022. However, the Fed still insists on the view that high inflation will prove to be "temporary" and believes that rapid rate hikes may not be necessary. The U.S. dollar was under pressure, but was boosted by the sharp drop in the pound. The U.S. dollar index subsequently rebounded sharply and hit a new high since September 28, 2020 to 94.634. The final trade closed up 0.08% to 94.214, marking the second consecutive positive week.

The Reserve Bank of Australia maintained interest rates at a historic low of 0.1%, but cancelled its forecast that interest rates are unlikely to increase before 2024, and abandoned its target yield on government bonds maturing in April 2024. However, it is emphasized that the inflation rate is still too low and does not show the hawkish tendencies that many people originally expected. The Australian dollar closed down 1.58% to 0.7399 against the U.S. dollar, ending the week's five consecutive positives.

The Bank of England "plays out of order"

The pound to dollar closed down 1.41% to 1.3493 this week, and hit a new low of 1.3423 since September 30. The Bank of England unexpectedly kept interest rates unchanged, placing the response to slowing economic growth in a more important position than expectations of soaring inflation. Officials also downplayed the market's expectations that interest rates will be raised several times and will reach 1% next year, pointing out that if this policy path is adopted, inflation will fall below the target by the end of the bank's forecast period.

However, the Bank of England stated that recent economic data reinforces the view that borrowing costs will have to rise "in the coming months" in order to keep inflation at the target level. The bank also pointed out that there are still major uncertainties in the job market after the government’s mandatory vacation plan for unemployed people during the pandemic ends. This decision may raise questions about the credibility of the Bank of England, especially Governor Bailey.

The Governor of the Bank of England Bailey said that economic growth is limited by supply chain disruptions. The price of oil in pounds sterling has risen by 80% this year, and idle capacity is expected to emerge later. Changes in energy prices are obviously very uncertain, and there are substantial risks surrounding this assumption.

Bailey also said that recent data reinforces the view that interest rates need to be raised and that it may be necessary to tighten policies appropriately. However, recent uncertainties still exist, especially in the labor market and continued domestic cost and price pressures. The unemployment rate is not expected to rise sharply in the short term, but there is still a lot of uncertainty.

In the past few weeks, Bailey's speculation about interest rate hikes has intensified. After issuing a warning on September 27 about the difficult outlook facing the economy, Bailey's subsequent speeches focused on the unexpected rise in inflation and the need to control price pressures. These remarks caused the market to fully digest the expectations of interest rate hikes this month, although economists hold a clear and evenly matched point of view.

Ulrich Leuchtmann, head of foreign exchange and commodities research at Commerzbank, said in a client report that Bailey "allows the market to move in the wrong direction" and said that "deteriorating communication" will make the bank's tools less effective in the future.

Kathy Lien, managing director of BK Asset Management, said: "The Bank of England's interest rate decision has a much greater impact on the foreign exchange market than the Fed's decision. The Fed has given the market enough time to digest and reduce the scale of bond purchases. Their forward-looking The guidelines are very effective. The Bank of England has always been hawkish, but they did not live up to their hawkish stance today, which violated market expectations."

Mitsubishi UFJ Financial and Monetary Analyst Lee Hardman wrote in a report to clients: “Because the recent speeches of Bank of England officials, including Governor Bailey, have boosted the prospects for early interest rate hikes, the Bank of England’s policy statement The hawkish tone surprised market participants. We expect the Bank of England to raise interest rates at its next policy meeting in December, although it is possible to wait for a while until February. This makes the Bank of England still one of the more G10 countries One of the hawkish central banks, but it is not as hawkish as the market expected, because it still insists on its plan to only tighten gradually in the next few years."

Difficulties for the Bank of England

The Fed said on Wednesday (November 3) that it will begin to reduce its bond purchase program this month, which is the first step towards the first interest rate hike, which is expected to start in the middle of 2022. The European Central Bank President Lagarde said on Wednesday that it is unlikely that the European Central Bank will raise interest rates next year. But compared to the two major economies in the United States and Europe, the current situation facing the Bank of England is more difficult. That is, as the government reduces stimulus measures including employment and raises taxes, inflation will exceed twice the 2% target set by the Bank of England. Expenses are squeezed. The British economy has to deal with the risk of post-Brexit trade frictions and the recent increase in new crown cases.

Financial website Forexlive commented on the Bank of England’s interest rate decision, saying that this week’s decision has caused the pound to immediately depreciate. The Bank of England has largely violated market expectations. As mentioned earlier, interest rate speculators have more or less digested their expectations of a 15 basis point increase in interest rates today.

Portfolio manager Hinesh Patel said: The Bank of England maintained interest rates at 0.1%, 15 basis points lower than the expected rate hike, and chose to wait for more evidence to prove the economic impact of the end of vacation plans and other government-supported plans. It seems that it is too early to take action today, because data on the development of the structural labor market is still insufficient, and it makes sense for the Monetary Policy Committee (MPC) to remain cautious.

The recent British data cast a shadow over the outlook. The manufacturing industry is struggling due to slowing output growth and rising prices. Frictions with the EU are still worrying. The current major manifestations are fisheries disputes between Britain and France, which may evolve into a wider range of issues. Trade disputes. These also put pressure on the pound.

Lagarde: The possibility of raising interest rates next year is very small

As the U.S. dollar gave up its gains, the euro closed up 0.06% to 1.1567 against the U.S. dollar, but the exchange rate hit a new low of 1.1512 since July 22, 2020. European Central Bank President Lagarde said this week that the possibility of the European Central Bank raising interest rates next year is very small because inflation is still too low, which overturned market expectations for interest rate hikes as early as October next year.


European Central Bank officials have echoed Lagarde's statement. European Central Bank executive committee member Schnabel said on Thursday that the European Central Bank is very aware of people's concerns about high inflation, but the possibility of raising interest rates next year is unlikely, and worried that excessive criticism of its policies may endanger its independence.

Greek media quoted on Friday the European Central Bank Governing Council member and Governor of the Greek Central Bank Stornalas as saying that the ECB’s loose monetary policy is still appropriate and rising inflation is a short-term phenomenon. Except for the United States, the world has seen no signs of inflation-related salary pressure.

Bank of Spain Governor Decos said that the European Central Bank is unlikely to raise interest rates in the third quarter of 2022 as the market began to anticipate, and it is unlikely to raise interest rates soon thereafter. De Gallo, President of the Bank of France, also reiterated that the European Central Bank will not need to raise interest rates next year.

As inflation is at a 13-year high, the market increasingly believes that the European Central Bank will withdraw from its ultra-loose monetary policy and raise interest rates for the first time in more than a decade next year. However, the European Central Bank maintained its interest rate policy unchanged last week, and President Lagarde did not strongly refute the fact that market prices recently reflected the expected two interest rate hikes next year, frustrating investors' expectations.

The European Central Bank and financial investors have been diverging on the possible path of inflation, partly because the European Central Bank itself is uncertain about inflation. Inflation is the most important guiding policy indicator.

The prospects for the Japanese prime minister's administration are mixed

The U.S. dollar closed lower against the yen again this week, falling 0.54% to 113.382 in the final session. Japanese Prime Minister Fumio Kishida is expected to introduce additional budgets to support companies affected by the epidemic. But his commitment to tackling wealth inequality has also aroused investor concerns.


The Liberal Democratic Party of Japan’s Prime Minister Fumio Kishida unexpectedly maintained a majority in the House of Representatives election last Sunday, cementing his position in a divided party and enabling him to increase stimulus.

Kentaro Hayashi, senior strategist at Daiwa Securities, said: "The Liberal Democratic Party won the majority of seats in the election alone. This positive surprise boosted the market. Investors are now more confident in the stability of the Liberal Democratic Party's long-term governance."

A particularly worrying issue is the plan to increase capital gains tax. Kishida once proposed to increase the capital gains tax, which later converged, but did not completely give up. His commitment to solving the problem of wealth inequality also aroused investor concerns.

Osamu Takashima, chief currency strategist at Citigroup, said: "The election results will increase risk appetite, thereby boosting stock prices in the short term, which is expected to benefit the dollar against the yen. However, the results of the polls have recognized his wealth distribution policy to a certain extent. They may be a bit disappointing for the stock market that is looking forward to reform and growth."

RBA highlights dovish prospects

The Australian dollar closed down 1.58% to 0.7399 against the U.S. dollar, ending the week's five consecutive positives. The Reserve Bank of Australia abandoned its commitment to maintain the target bond yield due in April 2024 at 0.1%, indicating that the target rate is expected to be raised earlier than previously expected. Strategists believe that this shows that the Reserve Bank of Australia, which is betting on the dovish stance, will make greater concessions.


The Reserve Bank of Australia also highlighted the dovish outlook in its quarterly economic outlook, which has left the Australian dollar struggling. While raising its forecasts for growth and inflation, the Fed also emphasized that progress in wage growth may still be slow, so it is prepared to remain patient with interest rates.

The Reserve Bank of Australia stated that the decision to abandon the yield target reflects the improvement of the domestic economy and the recent unexpectedly high inflation rate in the third quarter. However, the Reserve Bank of Australia will continue to buy government bonds at a rate of 4 billion Australian dollars (3 billion US dollars) per week, at least until mid-2022, and emphasizes that inflation is still too low.

ANZ Bank’s Australian Economic Director David Plank believes: “The current cycle is unprecedented, so the uncertainty surrounding our forecast is much greater than usual. One or two data points may cause a considerable change in perspective. ."

GSFM investment strategist Stephen Miller said: "The market expects more. After the inflation data was released last week, this is the smallest cancellation of monetary easing. This is not a sudden change by the Bank of Australia at all."

Ray Attrill, head of foreign exchange strategy at National Australia Bank (NAB), said: “The Reserve Bank of Australia has tried its best to be dovish in its policy statement...so in this sense, it is clearly trying to counter market pricing. The risk is that we might We will see the Australian dollar decline further in the short term."

Westpac analysts report: “The market continues to adapt to the relatively dovish information from the Reserve Bank of Australia, and considering the signal from the global central bank, it may further shift in this direction. Daily technical signals have also declined, indicating that we may Will see a fall to the 0.7300/50 USD area."

New Zealand dollar smashes again at 0.72 mark

The New Zealand dollar closed down 0.71% to 0.7114 against the US dollar, and the exchange rate was repeatedly blocked near the important integer mark of 0.72. In the previous two weeks, the exchange rate broke through this price several times during the intraday session, but ultimately failed to hold its position.


The employment report shows that the unemployment rate in New Zealand in the third quarter was 3.4%, a record low and well below the forecast of 3.9%. Employment surges and wages remain firm, which increases the likelihood that the Reserve Bank of New Zealand will raise interest rates by 50 basis points at a policy meeting later this month.

The Reserve Bank of New Zealand warned on Wednesday that increasing global inflation risks could lead to higher interest rates and lower asset values. The Fed pointed out that more persistent inflationary pressures and any increase in inflation expectations, coupled with weaker growth, may lead to a sudden tightening of financial conditions.

The Reserve Bank of New Zealand raised interest rates for the first time in seven years last month and signaled further tightening. The Reserve Bank of New Zealand will hold a meeting on November 24. The market fully expects that the central bank will raise interest rates by 25 basis points again to 0.75%, and there is a good opportunity to raise interest rates to 1.0%. If so, it will be much higher than most other developed countries.

Westpac Economist Michael Gordon said: "The starting point of the economy is much stronger than expected by the Reserve Bank of New Zealand, and the upside risk of inflation is increasing. The smooth sliding path of interest rates will be sufficient to control inflationary pressures. Therefore, we now expect the overnight call rate to peak at 3% in mid-2023."