Is the BoE the Fed’s Mini-Me? – Commerzbank
FXStreet (Córdoba) – The FX market seems to think that Fed and Bank of England (BoE’s) monetary policies will move largely in parallel, said Ulrich Leuchtmann, analyst at Commerzbank. According to him, while the BoE’s policy is indeed influenced by the Fed’s actions, the impact is certainly not as significant as assumed by the market.
“The G10 currencies have been considerably more volatile since the beginning of the year, with one clear exception: GBP/USD. In contrast to EUR/USD and EUR/GBP, GBP/USD has been considerably less volatile this year. That means that the market assumes a high correlation between the EUR/USD and the EUR/GBP exchange rate (currently about 74%). Investors seem to expect that the key influence on USD, EUR and GBP exchange rates will have a similar effect on USD and GBP in the near future”.
“With monetary policy still being the predominant issue on the FX markets, it is quite easy to spot this factor. There is a broad consensus among market participants that the BoE’s monetary policy (in particular the timing of the first rate hike) will depend to a considerable extent on the Fed’s rate decision”.
“The market expects that if the Fed increases its key rate soon, the BoE will follow suit. And in this scenario, both EUR/USD and EUR/GBP would depreciate. However, the markets’ expectations of the two exchange rates moving in synch might be exaggerated. The BoE is not the Fed’s Mini-Me. Especially at the beginning of a rate-hike cycle which might be slower than in the past, each central bank will have to individually signal its starting point and the subsequent pace of rate hikes. This will create uncertainty”.
“The fact that BoE governor Mark Carney did not change his rhetoric yesterday (even though the FOMC took a more hawkish stance) is not surprising. Moreover, one reason why the Fed’s course is so important for the BoE’s policy is that the BoE (just like many other central banks) wants to avoid an excessive FX reaction to its monetary policy decisions. That is why the BoE will take into account the fact that the ECB will soon pursue an even more expansionary course – and then, the current expectations concerning the correlation between EUR/GBP and EUR/USD will turn out to be exaggerated”.
The FX market seems to think that Fed and Bank of England (BoE’s) monetary policies will move largely in parallel, said Ulrich Leuchtmann, analyst at Commerzbank. According to him, while the BoE’s policy is indeed influenced by the Fed’s actions, the impact is certainly not as significant as assumed by the market.
(Market News Provided by FXstreet)