Volatility was in short supply for most of the session, very likely because forex traders were bracing themselves for the BOE statement, as well as the upcoming U.S. CPI report.
However, the pound soared across the board late into the session, thanks to the BOE’s upbeat assessment and outlook on the U.K. economy, as well as hints of a likely rate hike if the economy continues to evolve as expected.
As for the other currencies, most noteworthy is the Greenback since it was higher for the most part despite the upcoming U.S. CPI report. The Swissy is noteworthy as well since it tried to jump higher earlier only to get beaten back down again and even ended up as the worst-performing currency despite the risk-off vibes in Europe.
- French final HICP m/m: no revision from 0.2% as expected
- French final HICP y/y: no revision from 1.8% as expected
- SNB Libor rate: unchanged at -0.75% as expected
- SNB sight deposits rate: unchanged at -0.75% as expected
- CHF no longer as overvalued according to SNB
- BOE: 7-2 vote to keep the Bank Rate at 0.25% as expected
- Ian McCafferty and Michael Saunders voted for a hike again
- BOE: 9-0 vote to maintain stock of government bonds purchased at £435B
- BOE: 9-0 vote to maintain stock of corporate bonds purchased at £10B
- “[S]ome withdrawal of monetary stimulus is likely to be appropriate over the coming months,” according to BOE MPC minutes
Tight trading conditions
Trading conditions were rather tight during today’s morning London session, likely because of the BOE statement during the session, as well as skittishness ahead of the U.S. CPI report later, which is the final CPI report before next week’s FOMC statement.
By the way, Forex Gump has an Event Preview for the U.S. CPI report, so you may want to read up on that if you need to get up to speed on that top-tier event. You can read that here.
SNB monetary policy decision
As widely expected (and as usual), the Swiss National Bank (SNB) announced earlier during the session that it decided to maintain its current monetary policy.
As such, the target range for the Libor rate is still between -1.25% and -0.25%, with the median target rate at -0.75%. The interest rate on sight deposits, meanwhile, was held steady at -0.75%.
However, instead of repeating its mantra that the Swissy is “still significantly overvalued,” the SNB said that (emphasis mine):
“Since the last monetary policy assessment, the Swiss franc has weakened against the euro and appreciated against the dollar. Overall, this development is helping to reduce, to some extent, the significant overvaluation of the currency.”
Even so, the SNB said that:
“The Swiss franc nevertheless remains highly valued, and the situation on the foreign exchange market is still fragile.”
And as such, the SNB reiterated its “willingness to intervene in the foreign exchange market as necessary … in order to reduce the attractiveness of Swiss franc investments and thus ease pressure on the currency.”
On a more upbeat note, the Swissy’s weakness against the euro convinced the SNB to marginally upgrade its inflation forecasts.
As for specifics, here are the revisions taken directly from the SNB’s press statement:
“For the current year, the forecast has risen marginally to 0.4%, from 0.3% in the previous quarter. For 2018, too, the SNB anticipates an inflation rate of 0.4%, compared to 0.3% last quarter. For 2019, it now expects inflation of 1.1%, compared to 1.0% last quarter. The conditional inflation forecast is based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.”
MPC policy decision and meeting minutes
The BOE’s MPC released the minutes for its latest monetary policy meet earlier today. And as usual, below are some of the more important and/or interesting points in, well, bullet points for easier reading:=
- The MPC voted to maintain the BOE’s current monetary policy
- 7-2 vote to keep the Bank Rate at 0.25%
- 6-2 vote previous
- Ian McCafferty and Michael Saunders voted for a hike again
- Sir David Ramsden joined the BOE’s MPC on September 4, 2017
- 9-0 vote to maintain stock of government bonds purchased at £435B
- 9-0 vote to maintain stock of corporate bonds purchased at £10B
- BOE acknowledged that GDP growth in Q2 was sluggish mainly because of weak consumer spending
- However, “a substantial part of the weakness in household consumption in Q2 was related to a reduction in new car sales, which was expected to unwind partially in Q3“
- In addition, “retail sales volumes had risen and housing market data had also generally been slightly firmer“
- Given the above, “the Committee judged that most early indicators were consistent with a somewhat stronger profile for consumption growth in Q3 than had been incorporated into the Inflation Report“
- Moreover, “Net trade was also expected to pick up, bolstered by the past depreciation of sterling and robust global growth.”
- “Overall, the relatively limited news on demand had pointed, if anything, to a slightly stronger picture than anticipated in the August Report.”
- As for the labor market, jobs growth “had been resilient“
- In addition, “Underlying pay growth had shown some signs of recovery, albeit remaining modest“
- Moving on to inflation, “Headline and core CPI inflation in August had been slightly stronger than expected.”
- “Twelve-month CPI inflation had risen to 2.9% and was now expected to rise to above 3% in October.”
- “The Committee had noted at its last meeting that, if the economy were to follow a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast than the path implied by the yield curve underlying the August Report.”
- “[T]he economic data had been broadly in line with those projections.”
- And as such, “All MPC members continued to judge that, if the economy were to follow a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.”
- Moreover, “A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target“
ECB’s Jazbec speaks
ECB Board member Bostjan Jazbec was speaking earlier. And he said that the ECB needs “more data and more confirmation that what [the ECB is] doing is in line with fulfilling [the ECB’s] mandate” before the ECB can decide on tightening monetary policy.
However, he also said a tightening move “will inevitably follow.”
And with regard to the euro’s strength, he refrained from talking down the the euro and said the following instead:
“I would believe that strong euro is a reflection of robustness of growth development.”
“Exchange rate developments are just confirmation of all the policies that we’ve been employing since 2014.”
Risk aversion in Europe
Most of the major European equity indices were in the red during today’s morning London session, so risk aversion was apparently the dominant sentiment in Europe.
Aside from skittishness ahead of the U.S. CPI report, market analysts also blamed the risk-off vibes on the poor performance of mining shares, due to the the disappointing Chinese industrial data from earlier.
It should be noted, however, that commodities, including base metals, were actually mixed during the session itself.
- The pan-European FTSEurofirst 300 was down by 0.14% to 1,497.47
- Germany’s DAX was down by 0.23% to 12,525.00
- The blue-chip Euro Stoxx 50 was down by 0.22% to 3,519.50
U.S. equity futures were also bleeding a bit.
- S&P 500 futures were down by 0.06% to 2,493.25
- Nasdaq futures were were down by 0.11% to 6,002.13
Major Market Mover(s):
Like most other currency pairs, the pound was range-bound for most of the session before busting the moves near the end, thanks to the BOE’s hawkish message.
GBP/USD was up by 125 pips (+0.95%) to 1.3335, GBP/CHF was up by 150 pips (+1.17%) to 1.2897, GBP/JPY was up by 172 pips (+1.18%) to 147.64
The risk-off vibes and the SNB’s message that the Swissy is no longer as overvalued apparently caused the Swissy to shoot higher when the London session rolled around.
However, selling pressure swamped the Swissy later, despite the persistent risk-off vibes. No clear reason why, but it’s possible that Swissy bulls got spooked when the SNB clarified that the Swissy is still “highly valued” which is why the SNB repeated its promise (or threat) that it will continue to intervene in the forex market (*cough* currency manipulator *cough*).
Now that I think about it, it’s also possible that the SNB was weakening the Swissy again.
CAD/CHF was up by 17 pips (+0.22%) to 0.7934 with 0.7896 as session low, EUR/CHF was up by 34 pips (+0.30%) to 1.1501 with 1.1439 as session low, AUD/CHF was up by 19 pips (+0.25%) to 0.7733 with 0.7699 as session low
The Greenback was mixed for the session and was range-bound for the most part. However, it’s worth noting that the Greenback managed to catch a bid near the end and clawed its way higher against most of its peers. Of course, it totally had no chance against the overpowering pound. Maybe some traders are opening preemptive positions ahead of the U.S. CPI report?
USD/JPY was up by 26 pips (+0.24%) to 110.71, USD/CHF was up by 23 pips (+0.24%) to 0.9671, USD/CAD was up by 3 pips (+0.03%) to 1.2189
Watch Out For:
- 12:30 pm GMT: Headline (0.3% expected, 0.1% previous) and core (0.2% expected, 0.1% previous) readings for U.S. CPI; read Forex Gump’s Event Preview here
- 12:30 pm GMT: Canada’s HPI (0.4% expected, 0.2% previous)
- 12:30 pm GMT: U.S. initial jobless claims (300.0K expected, 298K previous)
- 3:30 pm GMT: Deutsche Bundesbank President Jens Weidmann will speak
- 4:00 pm GMT: ECB’s Mersch is scheduled to speak